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Hong Kong routs that wiped out US$35 billion spur oversight calls
[NEW YORK]After US$35 billion in market value was erased from three Hong Kong-listed companies over two days, investors are asking if the city's regulator should have done more to prevent the sudden selloff.
Goldin Financial Holdings Ltd and Goldin Properties Holdings Ltd, controlled by billionaire Pan Sutong, plunged more than 40 per cent Thursday. A day earlier, Hanergy Thin Film Power Group Ltd tumbled 47 per cent in 24 minutes before trading in the Chinese solar company's shares was suspended. The stocks, which had surged at least 500 per cent in the 12 months before the rout, can also be bought and sold by mainland investors through an exchange link.
The volatility illustrates the need for regulators to keep pace with the boom in China's stock markets. In Hong Kong, the Securities and Futures Commission and the bourse operator share the task of trying to weed out stock manipulation while also encouraging the equity market to play a bigger role in boosting economic expansion.
"Should the stock exchange focus on business or regulation?" Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco Ltd, said Thursday. "It cannot promote and regulate at the same time. The current management definitely wants more growth. When retail investors are upset, they protest. When foreign investors get burnt they will never come back."
While mainland authorities have cracked down on manipulation and insider trading in an effort to reduce risks as the rally lured a record number of novice investors, Hong Kong's SFC hasn't publicly stepped up its intervention in the city's equity market this year. The Hang Seng Composite Index has surged in 2015 as the Shanghai and Shenzhen rallies spilled over and investors bet that dual-listed stock valuations would catch up with their mainland counterparts.
Goldin Financial's 43 per cent drop on Thursday wiped out US$12 billion in market value while Goldin Properties, down 41 per cent, shrank by US$4.6 billion. Hanergy investors lost US$19 billion on Wednesday before the trading halt.
Goldin Group's operations are functioning normally, its financial position is stable and neither company is aware of any reason for the price swings, iPR Ogilvy & Mather, which manages both firms' external media relations, said by e-mail Thursday.
Hanergy said in a Wednesday statement the stock has been suspended pending "an announcement containing inside information."
Hong Kong Exchanges & Clearing Ltd spokesman Scott Sapp declined to comment on any regulatory action or individual stock price changes. Ernest Kong, a spokesman for the SFC, also declined to comment.
Like the Goldin companies, Hanergy is also controlled by single billionaire owner - Li Hejun. Almost no analysts tracked Goldin Financial or Hanergy even as their market values swelled to more than US$30 billion, making them among Hong Kong's biggest listed companies.
On Feb 18, Hanergy said it appointed Goldin Financial as its independent financial adviser on a supply agreement under which Hanergy Group would supply Hanergy Thin Film with panels, according to a regulatory filing.
Goldin Financial also engages in wine trading, factoring - buying the accounts receivables of other companies at a discount - and property development. More than 60 per cent of Hanergy's sales come from its closely-held parent, a solar panel and hydroelectric company. Hong Kong's SFC has been probing market manipulation in Hanergy's shares for several weeks, Reuters reported Wednesday, citing an unidentified person.
The volatility will hurt individual investors, and Hong Kong's regulator should take timely action to curb manipulation, according to Niklas Hageback, who helps oversee about US$225 million at Valkyria Kapital Ltd.
"Small time mom-and-pop investors are going to be badly burned," Mr Hageback, a partner at the Hong Kong-based money- management firm, said by phone Thursday. The regulators "need to act, if not on the hour at least on the day, and they're not doing it," he said.
While the commission's Chairman Carlson Tong has pledged to clamp down on "any unusual share movement," he said it's "natural to have a lot of market volatility" following recent capital inflows into Hong Kong's open market, the South China Morning Post reported May 13.
Hong Kong stocks available for trading by mainland investors have gained an average 30 per cent this year, compared with a 17 per cent advance in the Hang Seng Index, according to data compiled by Bloomberg. The turnover of Hong Kong shares traded through the exchange link, which opened in November, reached a record HK$235 billion (US$30 billion) in April, almost sevenfold that in March.
While there may be a need for more oversight, investors should know they will eventually bear the risk of trading stocks, according to Nicholas Yeo at Aberdeen Asset Management.
"There's a lesson to be learned on speculation: Don't follow the crowd," said Mr Yeo, the Hong Kong-based head of Chinese equities at Aberdeen.
Mainland mutual funds and retail investors will buy an estimated 200 billion yuan (US$32 billion) of Hong Kong stocks in the next two to three quarters, UBS Group AG analyst Wenjie Lu wrote in a note May 15. HKEx Chairman Chow Chung Kong said last month the bourse is preparing for a link with the Shenzhen Stock Exchange in the second half of 2015, modelled after the six- month-old counterpart in Shanghai.
Hong Kong regulators are too hands-off and need to do more to prevent price manipulation, said Hao Hong at Bocom International Holdings Co.
"They believe that, because the information is public, it's up to the investors to read before they buy stocks," Mr Hong, Bocom's chief China strategist, said in an interview in Hong Kong Thursday. "The problem with this kind of approach is that you can't fend off market price manipulation."