I wanted to go back to yesterday's post about the threat against Jimmy Lai's bankers and the effect that it would have on wealth management. I think that you have to view the offshore financial industry (that Hong Kong is a part of) as a Venn diagram.

Hong Kong still represents for mainland Chinese, a port of exit for their money from China. You can see this in the way the middle class use Hong Kong life insurance policies and RMB bank accounts in Hong Kong.

The question is whether the money will stay in Hong Kong or move to another offshore base like Singapore and London. It may well do, for the more sophisticated, or better informed and richer Chinese.

However much of that advisor role will still be in Hong Kong. The move by Goldman Sachs to partner with the ICBC; had been a long time in the works. With Goldman partners allegedly buying ICBC shares for at least the last decade. I suspect that this is designed to cut flows through the portal by allowing Chinese consumers to invest in foreign ETFs, whilst their money doesn't 'leave' the mainland.

This means that portal flows through Hong Kong will merit more scrutiny; especially if they go by 'non state owned' banks and insurance companies in Hong Kong like Prudential, Citibank or HSBC.

Money from out foreign that wants to move into China is increasingly likely to plug directly into Shanghai - the risk profile between Hong Kong and Shanghai is narrowing.

For Hong Kongers, including Hong Kong oligarchs, expect capital flight increases. The electoral reforms and the threat of CY Leung as chief executive both are bad news for the oligarchs. Jardines and KS Li have seen the writing on the wall for years and have been diversifying out of China and Hong Kong. Jardine Matheson has been building up its Astra conglomerate in Indonesia for years.

KS Li just uses the Hong Kong retail shareholders as cheap capital. In his article for Apple Daily Yeung Wai-hong explains how the Li family uses the concept of conglomerate discount to their advantage.

The CK Hutchison Holdings and CK Asset Holdings creation allowed shareholders to see clearly delineated businesses. One focused on property, the other one on non-property assets in 2015.

CK Asset Holdings started to blur the lines buying into businesses that more sensibly fit into CK Hutchison Holdings – aircraft leasing, pubs and utilities. Creating conditions for a conglomerate discount that is disadvantageous to non-family shareholders. The bigger business has a larger turnover. Even if the profit margin is lower, management still have an excuse to raise their salary and benefits.

CK Asset Holdings has a large amount of cash on hand indicating a lack of investment opportunities. Recently CK Asset Holdings bought shares in utilities from LKSF in exchange for shares in CK Asset Holdings.

I’ll let Yeung Wai-hong explain the next bit

"…CK Asset promised to buy back shares equivalent to the amount of HK$17 billion and cancel them. Whether the equity will be diluted is up to the minority shareholders. If they do not accept buyback, their equity will be diluted; if they do, then it won’t. The buyback price is about 10% more than the average share price of CK Asset, so the minority shareholders do have a chance to cash in at a “high price.” However, the buyback price of HK$51 per share is only 53% of the net asset value after deducting the debt. So accepting the buyback is like allowing Li’s family to grab a bargain at half price." - Conglomerate discount by Yeung Wai-hong, Apple Daily Hong Kong (March 29, 2021)

The theory goes that these trades slowly put the squeeze on minority shareholders at a discount. Transferring value to the Li family. Eventually allowing for a gradual privatisation of the business at the expense of retail shareholders.

The oligarchs in the biggest trouble are those whose holdings are exclusively based in Hong Kong and Mainland China, especially in the property sector. One sign of this is Tai-pan Merlin Swire resigning as chairman of Swire Pacific and Swire Properties a week ago.