COMMENTARY /Singapore's China futures; misplaced media frezy; commerce or corruption?

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October 2006

Future woes

The Shanghai Stock Exchange wants to stop its Singapore counterpart from running A-share index futures. But Singapore may actually be doing China a favor

Imitation is said to be the sincerest form of flattery but this appeared to be of little consolation to the Shanghai Stock Exchange (SSE) last month when the Singapore Stock Exchange (SGX) started trading futures based on China's top 50 A-shares.

The Shanghai and Shenzhen exchanges responded to Singapore's latest derivatives product by calling in the lawyers. Now FTSE Xinhua, which supplies the information used by SGX to construct the financial instrument, looks set for an appearance in court charged with violating both intellectual property rights and contractual obligations.

The goal is to cut off the flow of information to Singapore and stop the new derivative in its tracks.

FTSE Xinhua argues that it has done nothing wrong. And well it might. The world's stock exchanges are required to issue share price information into the public domain and do so knowing that it will be used for commercial ends.

For SSE to claim it has right of ownership over this information and any associated products amounts to a claim that it is exempt from international standards. At a time when China is preaching capital market integration, this is a foolish move.

It also an unrealistic one. Even if the FTSE Xinhua link is severed, SGX will just look for other ways of sustaining this potentially lucrative product.

Singapore is a past master at building futures contracts based on shares listed in other markets. When Tokyo stalled in developing its own index futures contracts, SGX came in and cornered the market. Taipei, finding itself in the same position in 1997, went as far as banning its citizens from buying SGX's Taiwan stock index futures. This was ultimately a fruitless effort and it's likely that SSE's complaints will prove just as ineffective.

Financial markets thrive on competition and China's financial derivatives exchange, which only opened in September, is in no state to take on the best in the business.

Which is an investor more likely to go for: the cumbersome Shanghai Shenzhen 300 futures with at least 200 companies too small to appear on the radar; or SGX's China A50 Index Futures that looks at all the big A-shares?
Singapore is a smart operator and China can learn a lot from it. But the main obstacles standing between SSE and a place among the elite futures houses are domestic failings, not foreign competition.

As it opens up its financial markets, China will only thrive if it meets international standards in terms of management, regulation and marketable products.

Singapore has provided investors in China with a means of hedging their risk. Until such time as Shanghai can supply its own credible hedging mechanism, foreign players are likely to take advantage of the services SGX offers. And with more balance to their portfolios, they will be willing to spend more in China. Not such a bad deal for SSE after all.

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Media storm spirals away from reality

Xinhua News Agency sparked a wave of international panic and criticism mid-September with moves to assert its authority over foreign news organizations that sell products to Chinese media and other clients.

Foreign news providers would have to go through an authorized agent to sell their stories, Xinhua announced. And Beijing's propaganda machine reserved the right to edit, censor and ban items that could endanger "national security, reputation and interests" as well as China's "economic and social order, or undermine social stability."
The protests came thick and fast.

Real time news services like Bloomberg, Associated Press, AFP and Reuters feared Xinhua, under the new regime, would gain a government-sanctioned monopoly on news and information distribution inside China.

Press freedom activists tied the announcement to a series of recent media crackdowns including Internet filtering and the high profile convictions of journalists from the Straits Times and New York Times.

Missing from the vast majority of the reaction, however, was a dose of reality. When all the noise was stripped from the debate, Xinhua's announcement really changed nothing, at least not immediately. It was simply an opening gambit in a negotiation.

Distribution of news and information has been tightly controlled in China for decades. In 1996, Beijing issued a new set of media regulations that, in theory, clearly stipulated who was in control.

But after a nasty confrontation with Reuters and Dow Jones, Xinhua relented and news organizations have since managed to expand their business in China, selling real time information to banks and brokerages, and articles and images to newspapers and magazines.

The driving factor in China in the last decade - and for the foreseeable future - is change. All else is secondary to the fact that China is opening up. The question isn't whether the country will open but how and when.

Three days after Xinhua's announcement, Premier Wen Jiabao had already qualified it by saying financial news would not be affected. The following day, government officials said the situation was temporary and the government would take over regulating the industry.

China's financial markets need unfiltered real-time information, while China's media and masses are increasingly aware of the difference between propaganda and unbiased news. China is becoming ever more integrated into the world economy.

Regardless of the surface noise, the information great wall is coming down.

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Necessary evils?

As the authorities root out corruption, financial regulators must open doors to investment

The latest annual audit by China's National Audit Office revealed that none of the country's central government ministries or organizations are unaffected by financial misconduct, or immune from its allure.

According to state media reports, auditors uncovered US$16.3 billion in public funds misspent by 54,000 government units and state-owned enterprises across the country during the first eight months of the year.

According to an anonymous source from the National Audit Office, 38 party and government leaders and 92 officials were reported to the judiciary for "bearing direct responsibility" for the misappropriation of more than US$755 million.

But it is no great secret that China owes much of its economic success to the height of its mountains and the distance to the nearest emperor. "Let's put it this way," said Kellee Tsai, a specialist in Chinese informal banking at Johns Hopkins University. "No one could have built up and got onto the Forbes list, or got even remotely close to the Forbes rich list, without bending rules in some way or adapting existing rules in some way."

It is this willingness, or indeed need, to bend the rules that has seen the "Forbes rich list" dubbed the "Forbes death list" in China, with a rapid rise up the charts of the rich and famous often followed by an equally sharp fall.

Zhang Rongkun, the chairman of Fuxi Investment Holdings, one of Shanghai's largest private investment firms, could be the latest to run this particular gauntlet.

Having amassed a personal fortune of US$605 million, which put him 16th in last year's China rich list, Zhang was detained late August for his part in a corruption scandal that saw at least US$420 million of Shanghai's pension fund sunk into real estate and other infrastructure investments.

Zhu Junyi, head of Shanghai's Labour and Social Security Bureau, is currently under investigation alongside Zhang, suspected of lining his own pockets through the transaction.

But it's a fine line between informal investment opportunity and vice in China. Faced with a dearth of legal investment options it is no wonder that government officials look outside the legal channels to earn a return on their spare change. Those involved in the pension fund were also working in the knowledge that, based on the investments avenues open to them, there was little chance of generating enough to support Shanghai's 2.5 million retirees.

Therein lies the catch. Because informal lending is dubious at best and oftentimes illegal, oversight becomes a liability and monitoring a rarity. Is it any wonder that the participants take the opportunity to add a layer of lining to their pockets?

If China truly wants to crack down on corruption, it needs to escalate its financial reforms and provide money managers with legitimate investment channels. Punishment is a necessary part of the cure, but so is the use of caution in clamping down on previously tolerated grey areas.

While the auditors must continue to identify those responsible for corruption, the financial regulators should examine whether it was failings in the system that tipped these people over the edge.

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