SOLVING the problem of oversubscribtion on new share issues is something both the Hong Kong stock exchange and merchant bankers are looking into. Last month's public offer of China's Kunming Machine Tool was 627-times oversubscribed, attracting $81.71 billion in bids for the $128.7 million float. Herbert Hui Ho-ming, head of the listing division of the stock exchange, said: ''We have to find a way forward to solve the problems, but different listing methods are applicable to different issues. No one method can dictate the market.'' Merchant bankers suggested that a tender offer or a ''book-building system'' might provide the answer. Mr Hui added that the exchange would find a way to serve both local retail and overseas investors. He emphasised that ultimately the merchant bankers would decide which listing methods would be suitable for their issues, and the stock exchange would not intervene. Securities and Futures Commission (SFC) chairman Robert Nottle had said there was a conflict of interest if one merchant bank acted as both financial adviser and underwriter in a float. This might arise because financial advisers want as high a price/earnings (P/E) ratio as possible, whereas underwriters want the opposite. However, merchant bankers disagreed with appointing a separate financial adviser for companies going public. ''I do not believe that a separate financial adviser will solve the problems,'' said Mark Patterson, managing director of Morgan Grenfell Asia. Clement Kwok, head of corporate finance at Schroders Asia, agreed, and said that companies were free to appoint their underwriters, and the price would be set at a reasonable level. ''It is no use if a financial adviser suggests the price earnings at 15, but 13 times P/E can only be offered by merchant bankers in the market,'' he said. Mr Patterson suggested looking at tender offer pricing or a book-building system to solve the problems of high oversubscription rates to new issues. ''The existing public offer mechanism is not fair to individual investors,'' he said. Mr Nottle said it was clear that the pricing of many share issues was not right. He said there should be an examination of whether the market mechanism was working properly.