Donald Tsang: scourge of the hedge funds

Euromoney editor Peter Lee talked to Donald Tsang, finance secretary of Hong Kong, during his hectic visit to the UK in November. Though he is finance secretary of what is only a special autonomous region of China, Tsang cuts the figure of a fully fledged finance minister on the international stage. He shot to worldwide prominence last year when, in an extraordinary step for an official from a freewheeling free-market centre, he intervened massively in the local stock market, buying up HK$118.1 billion ($15 billion) of shares in response to an attack by international hedge funds that was set to spread from the stock market to a devaluation of the Hong Kong dollar.

Tsang: greater transparency among governments should be matched by the hedge funds

Hong Kong withstood handover from Britain to the UK with scarcely a tremor, withstood the onset of the Asian financial crisis in 1997 far better than its neighbours, has shrugged off plunging property prices despite a disproportionate amount of its wealth and economic activity being tied to property, and today remains a world-class city despite pollution from mainland China that, were it any other regional centre, might be sufficient to dissuade companies and employees from locating to it. Two things might destroy Hong Kong: an increase in the tax rate or a collapse of the Hong Kong dollar. As an article of faith Hong Kong has maintained full convertibility of its currency while pegging the exchange rate to the dollar.

Tsang acted in extraordinary circumstances when he intervened in the equity market. A popular story in Hong Kong has it that his office had received intelligence that speculators were spreading rumours designed to cause runs on the local banks. There was a sense that real civil disorder might follow.

Since the crisis, the Hong Kong stock market has appreciated massively making Tsang look like one of the smartest investors in Asia, a label that makes him squirm. He has looked for ways to trade out of the position, the first being the tracker fund, an index fund of Hang Seng constituent stock owned by the government, which was about to be priced days after Euromoney met Tsang. It was massively oversubscribed, with HK$33 billion ($4.25 billion) of orders for a HK$10 billion offer. Perhaps wavering Hong Kong investors had their confidence boosted by announcement of news that Disney would open a theme park in Hong Kong, its third outside the US after Tokyo and Paris. Tsang was a mastermind behind the Disney deal, which requires a huge investment by the Hong Kong government.

The Hong Kong government will own a 57% stake in the joint-venture theme park company and Disney 43%. The government will inject HK$3.25 billion in equity, HK$6.1 billion in loans to the joint-venture company and spend HK$13.6 billion on infrastructure development and site formation. Disney, which didn't invest any equity in Tokyo, will inject HK$2.45 billion of equity in Hong Kong. The joint venture will raise HK$2.3 billion in commercial loans. It looks as if Disney got the best of that negotiation, but the Hong Kong government claims that there will be a huge positive impact on the local economy far beyond the park itself.

The government hopes to attract three million extra tourists a year to Hong Kong and projects a net present value of HK$148 billion in economic benefits spread over 40 years.

News of the Disney deal broke while Tsang was in the UK and he was up in the early hours of the morning for a video press conference beamed back to Hong Kong. Tsang spoke to Euromoney in his suite at the Mandarin Oriental in Knightsbridge still wearing a bow tie - his trademark - covered in Donald Ducks. He apologized for being late. He had just come from a meeting with UK chancellor Gordon Brown, having earlier lunched with Bank of England governor Eddie George. The day before, he had hit the headlines by using an address to a Confederation of British Industry conference in Birmingham to call for closer monitoring by financial authorities of hedge funds.

Isn't it a bit too easy to blame hedge funds for Asia's woes?

Please don't make me sound paranoid. I am only saying what I truly believe. Hedge funds cover a broad spectrum, including those that do genuine hedging and that is OK. And if anyone wants to conduct direct foreign investment in a country and wants to hedge by shorting the currency, by shorting the Hong Kong dollar, then that's OK too. But if you decide to descend on a country where you have no actual investment and devalue its currency in a very short time frame - as happened to sterling in 1992 - I have to ask is this the way the game should be played.

Now since the events of 1992 in the UK and 1994 in Mexico, the world has moved on in terms of transparency. Governments are increasingly open about their current accounts, their balance of payments, their reserves, potentially exposing their weaknesses. Should there not be similar disclosure requirements on hedge funds? I am not asking to control them. Coming from Hong Kong, we believe in free markets. I would never advocate controlling them or regulating them. But I believe in greater transparency as a way to prevent a recurrence of what happened [in Hong Kong] in 1998.

But hasn't the market solved the hedge fund issue? Many of them have deleveraged and after LTCM investors are less inclined to put money into hedge funds that won't disclose how they intend to manage it.

No. It's greed, still greed. If you put your money on deposit at HSBC you get 5%. These guys offer you 20% or more and the super-rich will park some of their money with hedge funds. The hedge fund community is getting larger, though there are also a lot of decent guys among hedge funds.

What forum are you suggesting might take up this challenge of monitoring hedge funds?

There is the G20 and the financial stability forum, which is due to report next spring. That I believe, is a major opportunity. Travelling in Asia in recent weeks I sense some euphoria, a notion that we can go back to the party. But we should not. We should think hard about what still needs to be done in the reform process.

Unless something is done, unless there is some agreement among the governors of central banks in the world's major financial centres on how to monitor hedge funds and financial flows through them, then there will be less coordinated regional responses. The Asians will do one thing, the Latins another and it will be pretty chaotic.
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