FOLLOW THE MONEY: THE POLITICS OF SHARE OWNERSHIP

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 001942

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR - WEISEL, JENSEN AND MAIN
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN
STATE PASS EXIMBANK
USDOC FOR 4430/MAC/EAP/J.BAKER
TREASURY FOR OASIA AND IRS
GENEVA FOR USTR

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EXIM PHUM PREL MY
SUBJECT: FOLLOW THE MONEY: THE POLITICS OF SHARE OWNERSHIP
IN MALAYSIA

REF: KUALA LUMPUR 0930

KUALA LUMP 00001942 001.2 OF 003



1. (SBU) Summary: A report by a respected local think tank
has sparked a political uproar by claiming that ethnic Malays
already control more than the government's target of 30% of
the shares on the KL Stock Exchange (KLSE). As the 30% goal
provides the underlying rationale for the bumiputera policy,
the pervasive system of socioeconomic preferences for Malays
and other indigenous peoples, the idea that this target might
have been achieved is political dynamite. The government's
own statistics indicate that bumiputeras own only 18.9% of
the KLSE. Deputy PM Najib quickly defended this figure and
said that further dispute "could hurt the feelings of certain
races and could be regarded as sedition even though that was
not the intention." The president of the think tank
retracted the report, but the chief author stood by his work
and resigned in protest. The argument over the numbers
brings to mind Mark Twain's admonition about "lies, damn lies
and statistics," but the uproar it sparked highlights the
continuing tensions between the different ethnic communities
in Malaysia. Anything touching on the fundamental bargain
between the politically dominant Malays, and the economically
connected Chinese, remains extremely sensitive in this
country. End summary.


Background: The Bumiputera Policy
--------------


2. (U) In response to race riots in 1969, the government of
Malaysia launched the "New Economic Policy" (NEP),which
aimed to strengthen national unity, eradicate poverty and
address the economic imbalances between the races in Malaysia
(reftel). At that time, the government estimated that
bumiputeras (ethnic Malays and a small population of
indigenous peoples) owned about 2% of the nation's wealth,
non-bumiputeras (mainly Chinese) owned 37% and foreigners
owned 61%. The NEP ushered in numerous affirmative action
initiatives with the aim of adjusting these shares to 30%
bumiputera, 40% non-bumi Malaysians, and 30% foreign owned.
The benchmark for measuring wealth was the share of corporate
equity on the Kuala Lumpur Stock Exchange (KLSE). The
scope of the preferences and privileges granted to
bumiputeras has grown through the years, but the ownership
targets have remained out of reach, at least according to
government statistics.

Be Careful What You Ask For
--------------


3. (U) In the course of preparing the Ninth Malaysia Plan,
the Government's five-year economic development framework,
Prime Minister Abdullah Ahmad Badawi invited public
participation and input, in keeping with promises he made to
solicit and accept feedback on social and economic issues.
In February 2006, the Center for Public Policy Studies
(CPPS),the research arm of the Asian Strategy and Leadership
Institute (ASLI),submitted to various government agencies
and members of Parliament its analyses and recommendations
for the five-year plan. ASLI is a respected local think tank
closely associated with the government. The chief author of
the report was a former World Bank and UN economist, and the
current Director of CPPS Dr. Lim Teck Ghee. Among its
numerous conclusions and recommendations, the report
questioned the methodology of the Government's calculation of
bumiputera corporate equity and suggested that the real
figure could be as high as 45 per cent of market
capitalization.

A Delayed but Explosive Reaction
--------------


4. (U) The CPPS report languished in obscurity and probably
had been forgotten by the government officials who had
received it. But in September Malaysiakini.com, a local
Internet-based news organization, discovered it on CPPS's
website, interviewed Lim, and posted a brief article focusing
on his estimate of bumi share ownership. Public outcry and
government outrage soon followed. Deputy Prime Minister
Najib quickly defended the government's figure and said that
further dispute "could hurt the feelings of certain races and

KUALA LUMP 00001942 002.2 OF 003


could be regarded as sedition even though that was not the
intention." Other political heavyweights piled on, and on
October 10 ASLI President Mirzan Mahathir, son of former
Prime Minister Mahathir Mohammed, retracted the report. In a
statement published on Malaysiakini.com he apologized for
"the hurt and confusion felt by all Malaysians caused by the
center's report," claimed that there were "shortcomings in
assumption and calculation that led to conclusions that could
not be vigorously justified," and stated that ASLI felt that
the report "did not fairly reflect the true picture of total
equity ownership" by Bumiputeras. Lim, however, stood by his
team's analysis and announced that he would resign at the end
of the month in protest.

Using The Wrong Measuring Stick
--------------


5. (U) CPPS's report "Corporate Equity Distribution: Past
Trends and Future Policy" identifies several questionable
aspects of the government's methodology. First, it points
out that corporate equity is only one measure of economic
ownership, and trends indicate that bumiputeras often cash
out their gains from stock shares. One affirmative action
policy reserves 30 per cent of Initial Public Offerings for
bumis, typically at a below-market price. The report claims
that while a newly-listed corporation may achieve 30%
bumiputera ownership at the outset, this figure drops quickly
as bumis cash out quickly to lock in profits at market
prices. They may not plow these earnings back into the stock
market but direct them to other investments, for example into
real estate where bumis also can benefit from preferential
deals. This drop in corporate equity, CPPS argues, should
not be seen as a drop in the proportion of national wealth
held by Bumiputeras.


6. (U) The report also pointed out that, while the original
goal of the NEP was to attain national unity by eradicating
poverty and addressing economic imbalances, the government's
affirmative action policies do not address the distribution
of wealth among bumiputeras. It notes that "...if just one
Bumiputera came to own most of this corporate equity with all
the rest holding little or nothing, the 30 per cent target
would still have been achieved."

Slicing the Government's Pie
--------------


7. (U) Even looking solely at corporate equity, CPPS had
concerns about the methodology used in determining the
government's figures. Most significantly, it points out that
the government owns approximately 36% of the nation's
corporate equity, but attributes all of these holdings to the
non-bumiputera side of the ledger. The CPPS report maintains
that the government should either subtract its holdings from
the total and calculate the ethnic shares of the 64% of the
of the market available for private ownership, or should
proportionately allocate the government's holdings to
bumiputera and non-bumiputera in some reasonable fashion.
The CPPS study proposed that 70% of government holdings
should be counted on the bumiputera side of the ledger, while
suggesting that even this allocation was probably too low.
Based on this 70% estimate, CPPS calculated that the
bumiputera equity share could be as high as 45 per cent.

Lies, Damn Lies, and Statistics
--------------


8. (U) The government's response to the report asserted that
it has better data that includes information on non-publicly
traded companies. Government calculations are therefore
based on data from 6,000 companies, both public and private,
while CPPS's figures are based only on Malaysia's 1011
publicly-traded companies. The government has not, however,
responded to CPPS's point about the allocation of
government-owned shares to the non-bumi side of the ledger.
Using the government's own figures for bumiputera equity, and
removing the government owned-shares from the equation yields
an estimate that bumis hold 29.53% of the equity that is
available for private ownership - statistically
indistinguishable from the target of 30%.


KUALA LUMP 00001942 003.2 OF 003


The Third Rail of Malaysian Politics
--------------


9. Comment: (SBU) The uproar sparked by the CPPS report
highlights the continuing tensions between the different
ethnic communities in Malaysia. Anything touching on the
fundamental bargain between the politically dominant Malays
and the economically connected Chinese remains extremely
sensitive in this country. The government may be able to
control the public debate, but the disconnect between its
avowed aims and economic reality will remain a sore point for
many.
SHEAR