The transcript from our May 14, 2001, live chat follows. The chat, "Hong Kong's Next Generation: Is the Wild East Growing Up?" featured FORTUNE Editor Louis Kraar and webb-site.com Editor David Webb.

Louis: This is Louis Kraar of FORTUNE, and we are pleased to have David Webb, editor of webb-site.com. David has demonstrated the power of the Internet. His independent, nonprofit site advocates better corporate governance in Hong Kong. David operates by dealing with facts and details, not theory.

Louis: I'll get things started by asking the first question. David, in the past year, a company nobody ever heard of emerged as the hottest company on the Hong Kong exchange. It was Pacific Century Cyberworks started by Richard Li, son of the richest man in Hong Kong. A year ago, his company was the hottest thing going in Hong Kong and now it has lost most of its large market cap. What does the rise and fall of PCCW say about Hong Kong? Is there a lesson here?

Louis: David, what did you know that most other analysts didn't seem to know?

David: I am a value investor. I like to look at the stock based on fundamentals. I think there are many other analysts who think the same way, but their judgment is sometimes clouded by their investment-banking complex. What we call sell-side analysts have an incentive to promote companies in order to issue shares, and this conflicts with the role of advising investors on company valuations.

Louis: In other words, these analysts are not independent.

David: That is correct. Also, I think the policy of analysis (not just in Hong Kong, but globally) leaves a lot to be desired, particularly when they resort to comparative analysis. This means circular arguments about one stock being worth X because another stock is trading at Y.

Louis: David, let's take some questions from our participants in cyberspace.

Dolphin: What impact will Asia have on global business in the next decade

David: I think Asia is already having a big impact. The GDP of China is already one-tenth of the United States, and 40% of the world's population lives in Asia. The low-cost labor base has been a major contributor to the economic success of the United States because by producing labor-intensive goods it has allowed the U.S. economy to shift up the technological scale. And at the same time these imports to the Unite States have kept the U.S. inflation under control. It's a surprising fact that 70% of the toys of the world are now made in Southern China. And the vast majority of plastic Christmas trees, for example, are also made in China.

Tanya: How can the world's largest multinationals tap into this rich and growing marketplace?

David: I think the question relates to the over 2 billion consumers of Asia. The answer is that global trade will continue to increase and the people who are producing labor-intensive goods will prosper and start buying high-tech goods from the West. However, do not underestimate the difficulty of doing business in a third-world country. Even after China eventually joins the WTO, they will erect non-tariff barriers to restrict competition in those sectors of the economy which are not yet ready for it.

Philo: The long-run average P/E ratio of Hong Kong is much lower than in the United States and the U.K. How much is this market discounted because it seems more risky than those in the West?

David: I would estimate between 20% and 30% discount is applied to Hong Kong because of its weaker corporate governance relative to the United States or the U.K. This discount tends to be largest for small and secretive companies.

Louis: David, let me get you to elaborate a little bit on this. Hong Kong wants to be a world-class financial center, but the stock market often is a gambling casino. How does it stack up to corporate governance, transparency, and treatment of minority shareholders?

David: The Hong Kong market could be described as the least bad in Asia alongside Singapore. That's nothing to be proud of. I have spent the last three years campaigning for better governance and I am making some progress. But in order to move the market into a longer-term value generating state and away from the casinos mentality, we need to create a more balanced framework which gives minority shareholders basic rights, such as the ability to choose independent directors to monitor their interests in the boardroom. One must remember that nearly every listed company in Hong Kong has a controlling shareholder. So, we cannot rely on public shareholder pressure to achieve these goals. What is needed is a top down reform to provide these rights.

Louis: David, which Hong Kong company is a good example of doing the right thing? Which are some of the ones that are making proper disclosures to shareholders?

David: I am reluctant to bestow any awards, but of the major companies, I would say HSBC Holdings is at the top of the ladder. However, this is because it is a U.K. incorporated and regulated company which just happens to be listed in Hong Kong.

Louis: David, at the other end of the spectrum, you recently pointed out another kind of performance, a relatively small Hong Kong cell-phone operator called Sunday Communications. That company raised the pay of its directors by nearly 300% last year, in the face of continuing losses. Yet, Sunday was rated by a brokerage firm as being among the better companies in corporate governments. How do you explain this disconnect?

David: I think the incentive to the brokerage when they issued that report was that Sunday issued its annual report in which the big increase in directors' pay was disclosed. Their viewpoint may be somewhat different when you look at the pay raise in the context of an 87% share price drop since the IPO of Sunday (which, incidentally, is also listed on Nasdaq).

Alex: Do Westerners really understand how to conduct business with China?

David: Some more than others. It takes a long time to understand the culture of a foreign market and it also depends on the sector in which you operate. But underlying any attempt to do business with China is the constant challenge of endemic corruption, and many westerners end up employing "consultants" to smooth the way. However, Chinese business people are not very different fundamentally from any other business people; they simply operate in a less regulated and more corrupt environment and behave accordingly. I am sure that doing business in the early days of the United States would have been similar.

Teri: What needs to be done to make the Hong Kong market more transparent for investors?

David: My time this year is being spent lobbying for a major new initiative. It is called HAMS, the Hong Kong Association of Minority Shareholders, and it would be funded by a small levy of 0.005% on trading. It would include three major areas. First, it would represent public shareholders' opinion and formulate policy proposals to improve their rights. It would be authoritative, because any investor could join the governing body of HAMS to reflect their views. I estimate there are 500,000 investors globally in Hong Kong stocks. I would hope to get 10% of them into HAMS within two years. The second area is a corporate government ratings service to score every listed company--good, bad and ugly--and provide a deterrent, as well as an incentive to better behavior. Investors would then use this measurement alongside traditional ratios such as PD and dividend yields. The third area is enforcement. Surprisingly, there are many existing laws which provide some degree of protection, and more are coming. But in Hong Kong, the cost of going to court is prohibitive to most investors and we have no class-action system and no contingent fee arrangements. Therefore, since people cannot enforce their rights, the laws do not provide a deterrent. HAMS would resolve this by acting on behalf of all of its members and seeking compensation on their behalf. The cost would be funded from the trading levy. This would then create the deterrent to reduce bad governance.

Louis: David, could I follow up on that just a little. Many of the companies listed on the Hong Kong market are from Mainland China. Do they make this market more attractive, and how are they at disclosing and being open? Do they meet international standards?

David: The mainland companies are mostly controlled by the mainland government. In the past, they have been very poor at corporate governance and thus things are changing. In the last year, the regulators in Beijing have made corporate governance a greater priority because after nearly a decade of public companies in China, they recognize that that governance is holding back economic reform. Secondly, they have a double in the domestic stock market in Shanghai and Shen with P/E ratios of between 50 and 70 times, and the market value is already the same size as Hong Kong. They have a bubble in the domestic stock market. So it is now important to deflate this before the market grows any larger, and to keep the market operating more smoothly after that in order to continue the reform process of moving from a centrally planned economy to a market economy. This process could be disrupted if the market effectively becomes inoperable due to a major crash later on.

Apps Good: The Hong Kong Securities and Futures Commission recently appointed you among seven members of the Takeovers and Mergers Panel. Can you advise regulators and still maintain independence?

David: That is a fair question. I do not think there is any complex and readers of webb-site.com will have seen my continued criticisms of the SFC's regulations. But I can achieve more by having my voice heard inside these bodies than simply heckling from the outside. And I think this applies to most forms of public protest.

Parker: You recently remarked that Hong Kong companies believe that stockholders should be seen, but not heard. Please explain what you mean.

David: Attending a general meeting in Hong Kong is a very Victorian process. I made that comment in relation to the Victorian era in which children should be seen but not heard--they were invited upstairs once a day to visit their parents, so long as they did not make too much noise. Attending an annual meeting feels similar.

Louis: David, I've heard that in Hong Kong some investors judge companies by the refreshments and food they serve at annual meetings. What do you think of this culinary measure of judging companies?

David: I don't think there is a good correlation there, but apparently the AGM of San Miguel Brewery is always a lot of fun.

Louis: You mean they serve a lot of beer?

David: Yes!

Wiz: Why is stockholder activism so rare in Hong Kong?

David: Activism is rare because there is very little that one can achieve in general meetings, either by voting or speaking. And to overcome this, as I said earlier, we need structural reform. Also, fund managers often care more about their performance relative to each other than their absolute performance over long periods of time. And the relative performance is unaffected by good or bad governance. It is like facing a headwind in a bicycle race. Everybody gets blown in the same direction.

Frank: Does the system work at all now, or is it holding China back from reaching its economic potential?

David: Poor governance is holding China back, and they are working on it. I think that the HAMS initiative will be an accelerating influence if it is adopted by the Hong Kong government.

Jennifer: Do you think Hong Kong will be the center of global business?

David: I don't think there will be any center of global business, but Hong Kong can be a regional financial center if it reforms its infrastructure, both financial and environmental. As we look out of the window in Hong Kong Island today, we can see the gray hills beyond--they should be green, but the air in between is gray.

Horton: Many companies listed in Hong Kong are from Mainland China. Do they make the market more attractive to investors? Do these mainland companies have good standards of disclosure to shareholders?

David: There are over 100 mainland-controlled companies in Hong Kong. As I mentioned, their governance has been poor in the past, but it is improving. They are beginning to emerge after 30 years of communism between 1949 and 1979 and are learning the skills of a capitalist economy. But you must remember that many of today's senior management grew up and were educated under communism, and have no formal training in the motives of shareholder values and financial performance. They also have conflicting objectives imposed by the government shareholder, such as maintaining stability of employment in their city and sometimes subsidizing loss-making unlisted companies.

Quill: What do you consider the best-governed listed companies in Hong Kong? And the worst?

David: If I told you the worst companies by name, I might spend a lot of time in court and this is one reason why HAMS, in order to give comprehensive ratings scores, must be given statutory immunity from libel so long as it proceeds in good faith. This is not unprecedented; the same protection is given to our consumer council and our securities regulator. I have already answered the first half.

George: What is the government willing to risk for economic growth?

David: The PRC government has to balance the need for total stability with the need for market reform. There are millions of jobs in state-owned companies which are redundant, but the government must let these go gradually if they are to avoid massive unemployment and social unrest. However, continuing to run loss-making companies at the top of the state makes it difficult for private sector companies to compete.

Peter: The mainland is so different from Hong Kong--will it ever catch up to that kind of growth?

David: Yes. By the time I am 82, and the 50-year period of the basic law which defines Hong Kong has expired in 2047, then I hope that the border will be almost invisible and mainland standards of living will have converged with those in Hong Kong, as well as the rule of law and the multi-party democracy. Sometime between now and then, there has to be a fundamental change in the single party state system.

Eddie S: How does corporate governance and transparency of Hong Kong-listed companies compare with those in other Asian markets, such as Tokyo and Singapore?

David: The Singapore market is similar to Hong Kong and much of its regulations were inherited from the same colonial power when Singapore became independent in the 1960s. And I am not an expert on Tokyo, but I believe the transparency of companies there is much lower even than Hong Kong. It is only very recently that Japanese companies published meaningful financial statements, rather than simply errant company statements in which the losses could be brushed under the carpet of subsidiaries.

Marianne: The Hong Kong Exchange plans to require all formal announcements by listed companies to be published on the Exchange's website. Is this an improvement in transparency?

David: Certainly this is an improvement, and it will make life easier for overseas investors who do not have access to the morning newspapers which contain paid advertisements from listed companies of their news.

Louis: David, I've always seen you as somewhat of a crusader, but a crusader with facts. A few years ago you wrote on your website a critical report about the Cyberport Project which was supposed to be a technology park, but as you and others point out, it is mostly a real estate and housing development. As I recall, you wound up being investigated by an international detective agency. What was that all about?

David: The Kroll Associates detective agency was appointed to investigate a barrage of criticism of this project. I was in the vanguard of that, largely because I believe the project should have been tendered and any developer should have had the right to win. I was surprised that anyone would feel so paranoid as to use a detective agency, but the worst thing about this was that the agent posed as a journalist. This undermines journalism in the same way that it would be undermined by a war photographer carrying a gun, and the freedom of the press and speech is paramount to maintaining a free-market economy. So now, I always have to verify journalists' credentials and I'm pleased to say that FORTUNE passed the test.

Louis: One last question. David, you were an investment banker, and now you are best known for running a nonprofit website, which all of us journalists follow. Which is more fun?

David: There is a lot of fun in my life and yes, a large part of it comes from the freedom of being able to publish my views on the Internet and with the large group of correspondents and supporters that I have received. There is no money in it, but I do feel that I am making some small contribution to our society here. And that makes up for the rest of my time, which is spent finding under priced small cap stocks in Hong Kong and benefiting only myself.

Louis: David, you've certainly contributed a lot to FORTUNE.com today, and we thank you very much.

David: It's been my pleasure!