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Telecommunications Buyout Shows China's Hand in Hong Kong Market

Hong Kong's dominant telecommunications company, PCCW, ended buyout speculation by accepting a purchase of 23 percent of its stock by a Hong Kong financier. The purchase price was lower than that offered by two foreign groups that had expressed interest in the company. But getting the price right was a secondary consideration to keeping China happy.

State-owned China Netcom holds just 20 percent of PCCW, but Chinese officials have been watching PCCW's buyout battle closely. PCCW Chairman Richard Li was juggling offers from Australia's Macquarie investment bank, and from the United States firm TPG Newbridge.

China said that it wanted to see Hong Kong owners of Hong Kong's telecommunications assets. And so it came to pass.

Francis Leung, a renowned Hong Kong dealmaker, stepped in to buy the PCCW stake for almost $1.2 billion. The price was considerably lower than that offered by the foreign bidders, causing a dip on Hong Kong's share market on Tuesday.

However, Howard Gorges, vice chairman of the South China Brokerage in Hong Kong, says the deal takes care of political sensitivities.

"China Netcom, the 20 percent shareholder, made it very clear that Hong Kong Telecom or PCCW should be run by Hong Kong people. So that was as if it was talking for Beijing," said Mr. Gorges.

Li created PCCW in 2000, when he bought Hong Kong Telecom from Britain's Cable and Wireless and pledged to create a regional Internet and telecommunications leader. But since then, PCCW's minority shareholders have seen the value of their holdings plunge. When talk of a sale began last week, there was hope for a higher bid to give their shares a boost.

That may yet happen if foreign suitors for the telecoms company come back into play. Gorges says what the sale has shown so far is that large investments in key Hong Kong companies need support from Beijing.

Buyouts around the world in industries seen as crucial to national sovereignty, ranging from ports to canals to telecoms, have often been subject to government interference, including in the United States.

However, financial and political analysts say the PCCW deal is notable for showing the limits to Hong Kong's autonomy and that China's clout in the city matters more than mere commercial interest. Beijing promises the former British colony local control over most internal affairs, including business deals, and Hong Kong's economy has long been touted as one of the world's freest.