There has been noticeable liberalization in the Malaysian economy. Statement by the Managing Director of Khazanah Nasional Berhad, Azman Mokhtar further affirms the trend of an increasingly liberal economy:
KUALA LUMPUR, March 28 (Bernama) — Khazanah Nasional Bhd is prepared to cut its stakes in government-linked companies (GLCs) in line with the government’s aspiration to reduce its stake in state-controlled companies.
Its managing director, Datuk Azman Mokhtar, said the government investment arm was committed to reducing its GLC stakes in a gradual and orderly manner. [Khazanah Ready To Cut Stakes In GLCs. Bernama. March 28 2007]
This is in line with sentiment expressed by the chairman of Khazanah, the Prime Minister himself:
Prime Minister Datuk Seri Abdullah Ahmad Badawi recently announced that the government would reduce its stakes in GLCs that had high concentration of government linked ownership. [Khazanah Ready To Cut Stakes In GLCs. Bernama. March 28 2007]
However, there might more than market liberalization going on at the moment. I suspect so after reading several sources that seem to suggest that the government might be intervening with the market under the guise of liberalization.
At Bernama today:
KUALA LUMPUR, April 10 (Bernama) — The government will increasingly float the shares of government-linked companies (GLCs) to make the stock market more attractive and competitive, generating interest among foreign equity investors.
“The foreign investors are looking for liquidity and big companies in the market,” Deputy Finance Minister Datuk Dr Awang Adek Hussin said, Tuesday. [Govt To Increasingly Float Shares Of GLCs On Local Bourse. Bernama. April 10 2007]
How could the government intervene in the market through the floating of GLCs’ shares?
A short visit to how a central bank operates might shed some light on the matter.
The central bank to some extent could influence the prevailing interest rate. It does that by buying or selling money. Keep in mind that money comes in many forms and does not necessarily comes in cash.
In order to raise the interest rate, the central bank buys, or perhaps more precisely, hoards money in the market. Once that is done, the quantity of money in the market is reduced and hence, the interest rate goes up. If the central bank would like to decrease rate, it just floods the market with money by selling it. This is a rough explanation but for our discussion, it suffices.
If that is clear, let us consider the equity market. If the government wishes to increase activity, it increases liquidity by releasing its shares to the market. If it would like to curb activity in the market for whatsoever reasons, it buys shares. Instead of a central bank, we have Khanazah, the investment arm of the government.
If that is clear too, it is time to put all that to perspective.
Not too long ago, the Prime Minister said confidently the Kuala Lumpur Composite Index might hit the now famous and magical 1,350 mark. A few days after he shared his opinion, through sheer luck perhaps, the market plunged spectacularly. While the fall was temporary, that was all it took to make the Prime Minister looked bad.
Now, consider the Prime Minister’s expectation and the recent statement on floating GLC’s shares.
If I were the Prime Minister, it would be tempting to act towards the 1,350 goal. One easy way to achieve that goal is by increasing the market liquidity by selling GLC’s shares. Or, more eloquently, in Liar’s Poker:
One trader remembers that “Lewie would say he thought the market was going up, and buy a hundred million [dollar-worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course the market would then go up. After he had driven the market up, Lewie would turn to me and say, ‘See I told you it was going up’…” [Liar’s Poker. Michael Lewis]
Hence, the possibility of government interference in the market. Of course, it is not intervention if the reduction of government influence in GLCs is done genuinely for the sake of liberalization.
But the question remains: are we seeing real liberalization or is it just a convenient cover to self-fulfill a Notradamus-style prophecy (oops, I mean expectation…)?