HONG KONG -- So much for the image of Hong Kong as the world's freest market. It's bad enough that for years a handful of real estate developers have conspired with the government -- which owns nearly all the land -- to keep property prices among the highest in the world by dribbling apartments onto the market.

Now, Richard Li, vice chairman of the firm that controls Hong Kong's second-biggest phone company,

Hutchison Whampoa

(HUWHY)

, is being allowed to control the biggest telecom firm in the place, with no more than a peep from antitrust regulators. This comes after a successful leveraged buyout this week by his nascent Internet firm,

Pacific Century CyberWorks

, which will take over leading fixed-line provider

Cable & Wireless HKT

(HKT)

later this year.

Li is being celebrated as Hong Kong's newest supertycoon, overnight amassing a fortune as big as that of his father, Li Ka-shing, who took 30 years to get this rich. The markets, however, are not as thrilled as the Li family about the deal. Shares of

Cable & Wireless

(CWP)

-- HKT's parent -- initially fell as much as 7% when shareholders realized they were getting a stake in a highly speculative company, which has yet to book a penny in sales. In Hong Kong Wednesday, HKT shares plunged 12.5%, and PCCW fell 6.6%.

Shareholders have good reason to be suspicious, because this deal was far from strictly commercial. Despite the fact that it's hard to see a great fit between a New Economy Internet and satellite firm and a former monopoly laden with copper wires, it's simply not imaginable that it could have involved anyone else.

The takeover is a stunning transaction not so much for what it says about Asian telecoms, but for what it says about the power of a single family. The Li family will now control about a third of the benchmark

Hang Seng Index

, almost all of Hong Kong's fixed phone lines and two-thirds of mobile phone users.

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While such concentrated control would provoke the suspicion of U.S. and European authorities, Hong Kong doesn't have such regulators. Rather, it's the world's most advanced economy without any form of overreaching competition law. Free trade reigns, as nearly everything comes into the place duty free, but setting up business to serve the 7 million inhabitants can be as difficult as doing so in many places in the developing world.

The government is not the only party treating the Li family with kid gloves. How many other borrowers could have arranged Asia's largest ever syndicated loan -- expected to be between $10 billion and $13 billion, backed by a company with acquisitive tastes and no sales?

Richard Ferguson, telecoms analyst at

Nomura

, estimates that with a net debt load of about $8 billion, Richard Li's new company will have debt repayments of $600 million a year. Based on operating cash flow, "they can just get by," he said.

Maybe, if the company continues to see its investments -- an investment in U.S. incubator

CMGI

(CMGI)

as part of a joint venture has already brought PCCW more than $800 million -- rise. But what if things turn ugly? And what if interest rates keep going up, something that wrecked a bunch of leveraged deals early last decade? "It's not a pretty scenario," says Ferguson.

A sale of some of HKT's parts could be in the offing, of course, perhaps from son to father. For the bankers of Hong Kong, who Richard Li's father happens to be matters more than who Richard Li is. One of Pacific Century's four bankers who put the loan together, Ian Adams of

Banque Nationale de Paris

, said that bankers would lend to the son only after obtaining guarantees that "widely protect their position."

That sounds less like cash flow, and more like a comfort letter from Li Senior.

Li Ka-shing denied a report in the

South China Morning Post

that he had leaned on

Bank of China

to finance his son's spectacular transaction. That may be technically true, but in today's Hong Kong, the Li family need not ask for favors: With the ear of the Chinese leadership and now a third of the stock market under its control, failing to help the family get what they want would probably turn out to be bad business.