HKEx must not tamper with its sound listing rules

Albert Cheng says sacrificing fair play to attract mainland heavyweight like Alibaba would not have been worth it, whatever the gains

PUBLISHED : Friday, 18 April, 2014, 3:14am
UPDATED : Friday, 18 April, 2014, 4:30am

Premier Li Keqiang's surprise announcement in Boao that the Hong Kong and Shanghai stock exchanges are to open up two-way trading in six months lifted the Hang Seng Index over the threshold of 23,000 points.

The positive market reaction is a stamp of approval for the Shanghai-Hong Kong Stock Connect scheme.

However, the reality is that economic growth in China is slowing and there's no sign of a change in Beijing's cautious policy. These factors work against the possibility of an influx of foreign and mainland capital to speculate in the Hong Kong stock market.

Beijing had planned in 2007 to allow mainlanders to trade directly in Hong Kong stocks, but that plan died soon after it was announced.

Bending the rules ... may be tempting but may be little more than sugar-coated poison

This version of the so-called "through train" is said to have been in the works for at least a couple of years. Charles Li Xiaojia, chief executive of the Hong Kong Exchanges & Clearing, put the scheme in his three-year strategy plan in January 2012.

However, when the premier unveiled the plan on April 10, both HKEx and the Securities and Futures Commission were apparently caught off guard. HKEx had to suspend its trading in-mid morning.

This is highly unusual, as market-sensitive announcements are usually made outside trading hours. Regulators would probably have been jumping up and down if a listed company under their watch, rather then HKEx itself, had not adhered to the practice.

The way the announcement was mishandled suggests that fair and open due process for protecting investor interests is hardly sacrosanct to HKEx under Charles Li.

Despite his American education, Li can be rather paternalistic and does not seem to understand what underpins Hong Kong's success as a global financial hub.

On April 7, he released a blog piece titled, "Are we asking the right questions about weighted voting rights?" It was positioned as a think piece in the wake of Alibaba's aborted listing plan in Hong Kong.

Li asked, for example, "Should Hong Kong compromise its 'one share, one vote' principle to secure the listings of powerful companies from China?"

Despite the many disclaimers in his article, he is obviously upset by the fact that local listing rules are too rigid to accommodate Alibaba's initial public offering here.

He questioned Hong Kong's current application of the "one share, one vote" provision and cited HKEx as an exception to the rule. "HKEx itself is not subject to this principle, as the Hong Kong government gets to appoint six out of the 12 non-executive directors and name the chairman, regardless of how many HKEx shares it owns (currently at 5.8 per cent)," he noted.

HKEx is a de facto monopoly. The government's disproportionate nomination rights are vital to ensure HKEx's effective and proper operation. It is a measure to safeguard Hong Kong's reputation as a financial centre.

It is understood that the government has frowned on Li's argument. A day after his blog, Li had to back-pedal. In a subsequent "clarification", he conceded that HKEx "may not have been the best example".

Li also cited the listing restrictions on controlling shareholders, family groups or big state-owned enterprises in connection with related party transactions as another area where "one share, one vote" has been consistently denied.

If this example serves any purpose, it reminds us of the reality that small investors' interests do not always align with those of the major shareholders. In such cases, it is invariably the small ones that need protecting.

I am not against reform. I have proposed relaxing listing rules for the local Growth Enterprise Market to make this otherwise sluggish platform more appealing to mainland companies. We should aim for flexibility and reform without sacrificing the principle of fair play.

Yet Li has set his sights on expanding the stock trading volume to the point of being short-sighted. Abandoning the tested principles of being fair and open will only be counterproductive in the long run.

Bending the rules to facilitate the listing of a mega corporation or two from the north may be tempting but it may turn out to be little more than sugar-coated poison.

There is an adage, dating back some 2,500 years, that warns of the dangers of conforming rigidly to one standard. One should never, it says, "cut the feet to fit the shoes". Equally, one should not cut the head to fit any hat.

The metaphorical feet and head of the stock exchange are both sound and functional. The last thing we want to do is disfigure them just to fit the "new economy" companies such as Alibaba.

Albert Cheng King-hon is a political commentator.