The View | Mainland Chinese define fraud differently, and Hong Kong regulators should wake up

Serving as China’s IPO assembly line has enriched the Hong Kong Stock Exchange, making it the world’s biggest bourse. But, this also means tolerating the inconsistent if not outrageous quality and outcomes of fraudulent mainland Chinese listings and conduct risk. Two recent incidents test the limits of even the most liberal and cynical investors.

Last week, Hong Kong’s top financial official, Chan Ka-keung, Secretary for Financial Services and the Treasury, urged listed companies to disclose information about its key officers following a growing number of those whose senior executives are reported missing.

A rising number of Hong Kong listed companies recently saw their chairmen go missing or out of contact due to mainland Chinese government anti-corruption investigations. Only in Hong Kong do mysterious disappearances of company directors elicit a phlegmatic response that assumes that detainment without due process is a normal regulatory event in modern capital markets. These filings might as well claim that directors were victims of extraterrestrial alien abduction. It would certainly be more believable.

The outright sting of 2015 came from China Metals Recycling Holdings, whose seven-year-old listing was cancelled by the Hong Kong stock exchange on December 31. According to HKEx it “obtained its initial listing by fraud” and is “no longer suitable for listing.”

HKEx added: “Through the fraudulent scheme, the company obtained its initial listing, for which it should not have qualified. It also misled the investing public to rely on the fabricated operations and financial position presented in its accounts published at the time of the IPO and years thereafter.”

Last February, the Securities and Future Commission (SFC) won a landmark court order to wind up China Metals Recycling. It claimed to be the country’s largest recycler of scrap metal, but was alleged by the SFC to have grossly inflated sales and profit by forging documents and transactions. The SFC said China Metal Recycling had overstated its sales by about 46 per cent, or HK$8 billion, and its gross profit by 72 per cent or HK$1 billion between 2007 and 2009.

The SFC remarked: “These accounts were set out in its IPO prospectus for the purposes of its application for initial listing and inducing investors to subscribe for shares. In the circumstances, the company or its business should not have qualified for initial listing in the first place.”