Malaysia's Manipulated Market

by Harun Rashid

Jul 30, 2001

The Malaysian government is in the process of shifting assets and management control of its capital markets from a faction loyal to the ex-finance minister to new control exercised solely by the prime minister. Public resources are being used unashamedly to accomplish this. The sums involved for a country of 23 million are enormous. Whatever potential Malaysia may have had as a region of advanced technological potential is destroyed. The money wasted on useless projects places a tremendous burden on future generations, and the addition of new projects now planned make Malaysia a deep debtor nation in perpetuity.

The Umno/BN party controls the printed media and television, either through direct control or through a requirement to obtain an annual operating permit. This method of licencing control is now being extended to all business activities in the country. Such unfriendly intrusion is certain to act as a dis-incentive to new business, and it gives established firms an excellent reason to relocate.

This unwarranted extension of annual licences threatens free enterprise at all levels. It is another means to facilitate further incursion of political domination of the markets. Interpreted correctly, it means the end of the free enterprise system in Malaysia. Every owner and manager must now operate at the dictate and whim of the prime minister. The intrinsic goodwill value of every existing enterprise is now zero, as there can be no further business activity if the prime minister gives notice the licence is not to be renewed. Only the foolhardy would venture into such a milieu.

Malaysia has an unusual stock market. It is often offered as an example of free enterprise occurring in SE Asia on the model of Western markets scaled down. This is far from a true picture, as any who have personal experience can attest. The spreads are wider than the door of an airplane hanger, and the necessary correspondence between audited reports and reality is missing. This is not always entirely the fault of the auditors, though generally they are not blameless. The error lies in the assumption that all market players are fools, which is more a dream wish in the prime minister's head than a reality.

The government has an heavy hand in all major industries, arbitrarily changing management according to the level of perceived subservience to political objectives. The largest companies are under the complete control of the politicians, and though almost are are hopelessly swamped in a sea of debt, the share prices are kept up by fund buying at the behest of and under the direction of the government. Though the Securities Commission continues to improve in its vigilance, the amount of unregulated activity defies description. The exercise of regulatory authority lacks persuasive vigour.

The Malaysian stock market is presently brisk in the rearrangement of assets. The volume of shares is artificially elevated to a highly exaggerated level. As a consequence, the KLSE index has moved from a low at the 550 level to around 650. There is nothing obvious to explain this optimism. Share assets are valued by underlying factors such as earnings, dividends and real property. All of these in the present business climate are declining.

It appears that the Malaysian government, in the person of the prime minister, is intent on buying itself back. To do this all the savings of the public are being squandered. The national pension funds are being depleted toward this effort, as are all other sources in the country. Bonds are being sold worldwide to generate additional purchasing power. Savings are being lost to support bankrupt firms, and new debt is being created that cannot be serviced.

Once share ownership in a given company exceeds a set percentage, an exchange rule requires that a general offer be made for the balance of the shares, but this requirement is easily set aside at the convenience of the government. Also, whenever purchases by one fund approach this limit, it is an easy matter to shift further purchases to another fund, thus exceeding the limit without generating a requirement to make a general offering for the balance of the shares. It is difficult to find a rationale for the behavour of the government, other than the desperate political position of the prime minister, who is under serious criticism for allowing the assets of the Umno party to be taken from under his nose.

In spite of signs the economy is worsening, share values are rising, in total defiance of repeated projections of decreased earnings. To watch this occur on a daily basis provokes foreboding that a time of re-valuation must soon come. There is no prospect of improved earnings to support a price-to-earnings ratio of 20:1, much less the 40:1 ratios still common. Who would hold indefinitely shares which will not their price after forty years of patient waiting, especially when there is every indication that the earnings are to soon fall? The repayment period will be extended beyond any realistic time. That being the case, the pressure to sell share assets can only increase, and values would fall to a realistic level without the decision to provide artificial support.

Because this adjustment is not occurring, the impression is that the market is being manipulated, in a vain effort to attract unwary foreign fund managers. The impression is reinforced by the unwillingness of the prime minister to allow any investigation into various matters in which the government is implicated. The report of the investigation into racial killings in a squatter village Kuala Lumpur are now to be an official secret. Allegations of official involvement and provocation using army personnel and hired thugs are thus not to be answered.

An attempt to raise five billion dollars in London using the fake bonds of a Malaysian govenment agency is well known, as is the unwillingness of the government to press charges against the perpetrators. The scheme is alleged to originate 'at the top'. The head of the agency involved has even been promoted by the prime minister. This incident has placed a dark cloud over the Malaysian bond market. Since it is the government which is the backer of most of the bonds issued in Malaysia, this is a serious matter, and has caused Malaysia to lose all credibility in the worldwide bond market.

When the market rises to reach a plateau, generally on excessively high volume, it indicates either a renewed interest by the investing public or manipulation. At the moment the market continues higher than normal volume, though it rises no further. This daily process, known as churning, indicates shares are moving from strong hands to weak hands, in preparation for a withdrawal of support and a market fall.

This up and down motion functions much as a pump, offering buyers who are locked into losing positions an opportunity to slowly work their way to a profit. This is done at the expense of the unwary, who tend to become enthusiastic after a rally, buy at the top and hold, hoping against hope as they stand paralysed, watching the market fall. Finally, filled with fear, they sell at the bottom.

If enough such sheep can be sheared, the prime minister may get a little of the party's money back. But fom whom? The sheared tend to be the public, those citizen/employee/consumers who contribute, oluntarily and involuntarily, to the public and union pension funds. They are growing wiser, slowly but surely, and with this increasing awareness comes a determination that the pilfering of their savings must stop.

The Umno/Bn politicians are aware of the potential strength of the unions. They show a modicum of respect and circumspection. This is not true for the NGO's, the various commissions, the Bar Council, the Chinese associations, the student associations, and the opposition parties. All these receive neither response nor respect. Yet even with the increasing union activism, the fund looting continues. The annuity scheme of the EPF is not cancelled, and the money is not refunded. The members of the bank employees union are directed to repay the stock market losses of their fund manager by a 10 percent monthly salary deduction. It will take a year, perhaps two, as the losses amount to about RM25,000 per member. The bank union members were not invited to participate in the operation of their stock market adventure. They didn't know until it was too late.