After Friday's panic selling of the so-called penny stocks following Thursday's publication of a proposal to possibly delist them, it is easy to blame Hong Kong Exchanges and Clearing for failing to anticipate market reaction.
But the fact was that at the close of trading on Thursday, of 791 stocks listed on the main board, the prices of 386, or about 48 per cent, were below 50 cents, the level at which the stocks concerned would have to be consolidated. Only if consolidation failed to raise their prices above the threshold would the stocks be delisted.
While stocks fell across the board on Friday, only a small number plunged precipitously. According to the Securities and Futures Commission, the 30 most heavily traded 'small' stocks accounted for merely one per cent of total value of transaction and their total market capitalisation amounted to just 0.06 per cent of all listed companies. This showed that holders of lowly priced stocks of well-managed companies had not panicked.
Even if the proposal was accepted, there would be a long lead time before it would be implemented. With the exception of the stocks of companies that are poorly managed and consistently fail to return a profit, most should be able to continue to trade on the main board by raising their prices above the 50-cent threshold through consolidation.
Moreover, while the proposal was announced on Thursday, it had been anticipated for a long time. Unfortunately, coming at a time when the market was bearish, the formal release of the proposal had provided some brokers who had given credit to holders of the penny stocks with an easy excuse to call in their loans.
In the interests of Hong Kong's status as an international financial centre, something definitely needs to be done about the penny stocks, which are prone to manipulation by those with the means to easy credit and the rumour mills.
