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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek TIME AsiaNow

The CLOB Revisted
Is there an end in sight?

October 26, 1999
Web posted at 7:30 p.m. Hong Kong time, 7:30 a.m. EDT

The Week Ahead
Watch for surprise choices by President Wahid
- Monday, Oct. 25, 1999

Business: What Now for Indonesian Markets?
Can the Gus Dur-Megawati Dream Team restore confidence?
- Saturday, Oct. 23, 1999

Technology: She's on Top
Hong Kong crowns its Ms. Internet 1999
- Saturday, Oct. 23, 1999

The View From Down Under
Australia's Alexander Downer on Indonesia's new president
- Friday, Oct. 22, 1999

Economics 101
The IMF is (still) trying to teach free markets in Indonesia
- Thursday, Oct. 21, 1999

Business: What the markets think of Gus Dur
With Tim Condon, Indonesia specialist
- Wednesday, Oct. 20, 1999

Myanmar-Thailand Relations
Still lousy after all these years
- Tuesday, Oct. 19, 1999

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If there is one business story in Southeast Asia that simply refuses to go away, it is the CLOB crisis. For those who have been on the moon for the past 14 months and have missed all the action, let me recap: CLOB stands for Central Limit Order Book, a secondary market in Singapore that traded mainly Malaysian stocks. In its heyday, transactions on the CLOB far exceeded the transaction volumes for Singapore shares listed on the main board of the Singapore Stock Exchange. At one time market value of CLOB shares was between US$15 and $20 billion. During the Crisis, Malaysian Prime Minister Mahathir and his associates accused Singaporeans and CLOB shareholders of subverting the Malaysian economy. In September of last year, when Mahathir imposed capital controls and pegged the Ringgit at 3.80 to the dollar he also banned the trading of Malaysian shares overseas -- effectively pulling the rug out from under CLOB. Since then 180,000 shareholders holding $4.3 billion in Malaysian shares listed on CLOB have not been able to trade their shares.

Malaysia now says CLOB was an illegal market -- even though Malaysians accounted for 20% of total CLOB trading and two Malaysian-controlled brokerages were among the biggest players in the CLOB market. Malaysia doesn't want CLOB shareholders to get their shares back because it believes they will immediately sell them and that will result in the depletion of $4.3 billion in foreign exchange reserves. But by denying the CLOB shareholders their right to sell the shares, Malaysia has sent the wrong signals to global investors who are encouraged by Kuala Lumpur's economic recovery story and want to invest in the bourse.The CLOB overhang is keeping them away. Realizing that the issue is hurting Malaysia, Kuala Lumpur has been at pains to resolve it. The only problem: some troubled Malaysian companies see the resolution of CLOB as a good opportunity to make money.

In the past six months, five officially-backed schemes to resolve the stalemate have surfaced and have all been rejected by CLOB shareholders. Normally, the Singapore government would not intervene in something like this, but because 180,000 or so of its 3 million citizens are involved Singapore leaders have been forced to speak out. Singaporeans want a fair and equitable solution to CLOB. They want Malaysian regulators to either a) hand the shares back to their rightful owners so that they can trade them whenever they like; or b) allow an entity -- like the Tracker Fund that Hong Kong has just launched following its own share-buying binge last year -- to buy out shares at market value.

Last week, United Engineers (Malaysia) or UEM -- a Malaysian construction and infrastructure group controlled by Halim Saad, a close friend and former business associate of Malaysian Finance Minister Daim Zainuddin -- unveiled yet another plan to entice CLOB shareholders to part with their shares. The buzz in Singapore and Kuala Lumpur is that a final solution could now be near.

Before I go any further, let me bring you up to date with all the CLOB schemes that have failed. Earlier this year, Singaporean businessman Akbar Khan, a horseriding pal of Prime Minister Mahathir and a close friend and associate of Daim, unveiled a plan to buy all the CLOB shares from Singaporeans at up to a 70% discount to the then-prevailing market price. The response was overwhelming: NO. Who in his right mind would want to sell shares at a 70% discount to the prevailing market price? Next were two funds -- one controlled by Khan, another controlled by the family of Mahathir's long-time friend and mate Tunku Abdullah of Melewar Group. They too offered to buy the CLOB shares at a discount, albeit a smaller one. Next up: a proposal by UEM and Telekom Malaysia (the state-controlled listed dominant phone company) to buy CLOB shares at 25% discount for most shares. Investors responded by hammering Telekom stock despite its own improving fundamentals. The Malaysian government, which owns over 70% of Telekom, has been trying for months to sell 30% of its shares to Japanese phone giant NTT (it would use the proceeds to reduce the budget deficit and help the economy). NTT has apparently been telling the Malaysians they like Telekom but don't understand why a fixed line telecommunications company is interested in buying CLOB shares. Evidently Telecom started wondering too, and last week, it officially pulled out of the CLOB-share deal. That allowed UEM to launch yet another scheme to buy CLOB shares. The big question: Is this any different from the all those other deals? For one thing thing, the personalities haven't changed. UEM is controlled by Halim Saad who recently married Khan's niece in Singapore. So almost every CLOB deal has involved either Khan or Halim Saad.

But UEM officials say CLOB shareholders, instead of listening to analysts and investment bankers or reading commentaries in biased foreign media, should now take a serious look at the latest plan. On the face of it, the plan does look different. What UEM has done is to break up the CLOB shares, comprising of stocks in 146 companies, into four separate groups in order of stock quality. At the top tier, UEM will offer to buy shares at the prevailing market price. Second tier stocks will be purchased at a mere 10% discount. But third and fourth tier stocks will be purchased at 40% to 80% discount to the current market price. In reality while the proposal looks attractive for the handful of CLOB shareholders holding top-tier stocks, it undervalues the stocks most other CLOB shareholders own.

Analysts say even the holders of top-tier stocks are actually getting a bad deal. First, even though their stocks are repurchased at prevailing market prices, they will not be offered cash but shares of UEM. The problem is that UEM stock has actually been falling in recent months. Moreover, UEM is issuing more shares at a huge 30% premium to its current stock price to pay those CLOB holders. According to analysts, the flood of new UEM scrip will depress the UEM share price even more. One Kuala Lumpur analyst has worked out that if all CLOB shareholders agree to the proposal, fair value for UEM stock could go 20% below its current price of around Ringgit 6.50 a share.

So yes, I expect another resounding NO from CLOB shareholders to the latest proposal. But I don't expect the CLOB issue to fade from the headlines. I am told that Malaysian authorities have been sounding out their Singapore counterparts on other proposals. One of them is to let the Singapore Government Investment Corporation, or GIC, in on the next CLOB share-purchase scheme. This will dispel the notion that politically well-connected Malaysian firms are out to make a buck at the expense of middle class Singapore investors who had invested their nest eggs in Malaysia. But if GIC (along with its impeccable reputation) is to come in, it would demand minimum discounts and a fairer approach. Kuala Lumpur analysts say that even if GIC refuses to participate in a new scheme, there are several other proposals under consideration -- all with smaller discounts, all appealing and attractive. Singaporeans would like what they see, KL market watchers say.

Maybe they will; maybe they won't. Why not just hand the shares back to their rightful owners? Prime Minister Mahathir himself says Malaysia's foreign exchange reserves are now over US$32 billion. An additional $4.3 billion fleeing Malaysian shores would hardly make a dent. So why not let the market do all the talking and relegate the unfortunate episode to history? The removal of the CLOB overhang could actually spur the Kuala Lumpur bourse and bring back some of those foreign investors who have spent much of the past year sitting on the fence. In fact, that sounds like a win-win strategy for both Malaysia and CLOB shareholders.

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