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Hong Kong takes stock of market
regulation
By Gary LaMoshi
HONG KONG - While the panic over SARS (severe
acute respiratory syndrome) overwhelms the SAR (special
administrative region) and government officials earn low
scores for their efforts to counter the pneumonia
outbreak and accompanying hysteria, there's a remedy on
the table to cure an advancing financial epidemic. We'll
see whether Hong Kong's leaders have the guts to
administer the necessary medicine.
This epidemic
is senseless stock-market listings. The answer, proposed
by an independent panel of experts commissioned by
Financial Secretary Anthony Leung, is to take oversight
of market listings away from the for-profit Hong Kong
Exchanges and Clearing Ltd (HKEx), the designated
stock-market monopoly, and transfer those regulatory
functions to the government's Securities and Futures
Commission.
The expert group's report won an
immediate endorsement from Leung, who promised to draw
up an implementation plan and submit it to the Executive
Council for speedy approval. HKEx also pledged to
cooperate with the reforms and work toward a smooth
transition, then backtracked to protect its turf.
In for a penny ...
Leung commissioned
the expert panel to examine listing regulations in the
wake of last year's penny-stock panic (see Stock fiasco speeds Hong Kong's
decline
, September 20, 2002). A
bonehead proposal to restrict trading in companies
selling below HK$0.50 (US$0.064) led to a massive small
cap share selloff. The boneheads behind that proposal:
HKEx.
The expert group report stated bluntly
that, when it comes to market regulation, "the current
structure is fundamentally flawed". HKEx, a company
listed on its own stock exchange with a duty to maximize
profits for its shareholders, is also expected to
regulate its market in the public interest. Those two
incompatible roles present an obvious conflict of
interest.
Last year, HKEx derived 18 percent of
its total revenue from listing fees, and that percentage
has been rising as market turnover declines.
Unsurprisingly, HKEx approved 274 out of 275
applications for listing last year. The expert group
found "widespread belief that in the effort to achieve
critical mass and maximize the quantity of new listings,
the quality of the new listings on the HKEx has been
seriously compromised".
The current rules
attempted to mitigate the conflict between profits and
public interest by giving ultimate authority to a
Listing Committee composed of part-time volunteers from
the finance industry. Relying on busy professionals as
volunteers is difficult enough for the church social
committee; it's no way to regulate a major equity
market. In practice, HKEx sets the agenda, and the
committee acts as an underinformed rubber stamp.
Conveniently, each side can deflect responsibility to
the other. A 20 percent quorum rule even lets the
committee disavow its own actions.
Slim,
shady
Listing shaky or shady companies deepens
the real problems HKEx tried to combat with its
ill-conceived penny-stock proposal: poor-quality
listings diminishing the market's international image.
New listings in Hong Kong continue to grow, defying
global trends as well as share-price and turnover
declines.
The expert group pointed out that many
of newly listed companies attract little public interest
before listing and are thinly traded afterward; half of
the stocks on the Growth Enterprise Market are not
traded at all on an average day. Moreover, the report
cited many recent new listings that have declined
precipitously, degrading overall market performance.
That can lead to lower asset allocations by
international fund managers, as well as perception
problems among all investors.
Perhaps most
troubling, the report said that new listings often defy
commercial logic. A significant number of listings
appear to be for purposes other than raising capital for
business growth, the normal reason to list on a public
stock market. Of 60 companies that newly listed on the
Main Board of the stock exchange last year, 18 paid out
dividends ahead of the public offering that exceeded the
proceeds of the offering.
Since the goal isn't
raising funds, possible alternative explanations for
such stock-market listings, according to the report,
include creating a vehicle for manipulation,
establishing a shell company for later sale to another
company for a so-called "backdoor listing", or enhancing
finance opportunities from other sources through the
prestige of a listing. "None of these suggestions
enhances Hong Kong's reputation as an international
financial center," the report dryly noted.
The
experts group has sensibly proposed giving
responsibility for listing rules to a new Hong Kong
Listing Authority under the Securities and Futures
Commission and independent of HKEx. It also urged
scrapping the current disclosure-based system (which
functions like the US military's "don't ask, don't tell"
policy) to real rules set by professionals, not
part-timers, and real penalties for violating them.
Laissez faire where?
HKEx
chairman Charles Lee withdrew his earlier endorsement of
the report and is now appealing to Chief Executive Tung
Chee-hwa and his Executive Council to order further
consultations before the government takes away
any power from the private sector - in
this case, Lee's corner of the private sector - and
puts it into the hands of government bureaucrats.
(Investor advocate David Webb, who is running for
a seat on HKEx's board of directors, counters, "Nothing could be
more slow and bureaucratic than HKEx in its administration of the
Listing Rules.") Growth Enterprise Market (GEM)
listing committee chairman Lo Ka-shui expressed his
dissatisfaction with the experts by resigning last week.
Chairmen Lee and Lo each appealed to the laissez
faire tradition that made Hong Kong great to limit
government interference in markets.
That this
laissez faire call to arms comes from officials
of a government-granted monopoly underscores how much of
Hong Kong's fabled unfettered capitalism is purely
fable. Furthermore, Lee is appointed by the SAR's chief
executive, and, interestingly, his current term ends
next week. After 150 years of unelected,
unrepresentative government imposed by outsiders and
catering to vested interests, you can't blame Lee for
having skewed perceptions.
The government gave
HKEx its monopoly to further the public objectives of
developing Hong Kong as the primary capital formation
center for mainland China's companies and making Hong
Kong one of the five leading equity markets in the
world. (In terms of regulation, Hong Kong might not
crack the Asia-Pacific top five.) HKEx has done a good
job on the former goal, in the absence of strong
competition, and a rotten job on the latter.
The
experts group has shown the way for the Hong Kong stock
market to take another step away from being a club run
by and for tycoons and their financial manipulations and
toward the government's stated goals. We'll see whether
Hong Kong's leaders put enough stock in their own words
to carry out these sensible and necessary reforms.
(©2003 Asia Times Online Co, Ltd. All rights
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