Market circuit breakers treat only the symptoms

PUBLISHED : Friday, 02 July, 2004, 12:00am
UPDATED : Friday, 02 July, 2004, 12:00am

A full seven years after the handover, Hong Kong's integration with the mainland continues apace. Nowhere is this more pronounced than its stock market, stuffed with a growing legion of mainland firms.

Boasting the largest equity market in Asia after Japan, this is one area where Hong Kong leads its master. China, by contrast, finds its speculative stock markets too often shunned by investors and issuers.

This equity market dichotomy can break down, however. What, for instance, does a mainland firm and a mainland broker together in Hong Kong add up to - a mainland stock market?

The spectacular collapse of China's Far East Pharmaceutical Technology under a wave of irrational margin selling by mainland-controlled broker Guotai Securities might suggest so.

Now it appears our regulator believes our equity market is regressing to standards of behaviour seen over the border after the announcement that investor protection from volatile daily trading fluctuations is being considered.

This radical departure from Hong Kong's commitment to a free-trading market smacks of treating the symptoms rather than dealing with the cause of unsettling share-price volatility, namely deteriorating standards of disclosure and behaviour by some listed companies and brokerages.

Rattled by market volatility, Hong Kong Exchanges and Clearing chief executive Paul Chow Man-yiu suggested single stocks or the entire market could be suspended if prices fell abruptly. Such action to introduce 'circuit breakers' to counter big price moves up or down is inevitably going to be linked to the recent 93 per cent loss in share price of the still-suspended drugs and vitamin maker.

But these less-sophisticated new mainland arrivals are not the culprits, according to Hong Kong Monetary Authority chief Joseph Yam Chi-kwong, who lays the blame squarely with other, less welcome guests - hedge funds.

But surely plain brokerage margin financing is the obvious culprit here. Only after Guotai Securities declared it owned 25 per cent of Far East Pharmaceutical, spoils of defaulted margin accounts, did the precarious financing behind the drugmaker's collapse come to light.

A circuit breaker might have slowed Far East Pharmaceutical's meltdown, so too could an earlier suspension by HKEx, which waited until there were four minutes of trading left. Still, this misses the bigger issue.

Inevitably a market's behaviour is only going to be as good as the participants - listed companies and brokerages - that buy and sell the shares and take them to market.

Devising rules that satisfy all market participants is inevitably tricky. Attracting more mainland companies might be a priority, but keeping an edge as an international market means current residents such as HSBC or Hutchison need to be kept happy.

But one principle seems clear: China's equity markets should be striving to become more like Hong Kong's, rather than the reverse. That means mainland institutions should raise their game, rather than Hong Kong be too quick to lower its standards.