Jake's View

Is the HKEX chief throwing caution to the wind with his New Economy dalliances?

PUBLISHED : Monday, 19 June, 2017, 12:16pm
UPDATED : Monday, 19 June, 2017, 10:47pm

Hong Kong may have a brand new market next year for new economy companies, according to a consultation paper released yesterday by Hong Kong Exchanges & Clearing (HKEX) -- SCMP, June 17

How interesting that 30 years after unifying four stock exchanges into one exchange, we are now being asked to split it back into four exchanges.

It is what HKEX chief executive Charles Li Xiaojia champions in his latest attempt to get lower, much lower, listing standards for his favoured “New Economy” companies.

The idea is that the main board and its embarrassing secondary GEM market for failed New Economy stocks of the 1999 Internet Bubble will be given some tighter standards and then told to go away and forget themselves. Charles Li is not interested.

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His interest lies in two new boards he wishes to set up, the Trash Pro and the Trash Premium. Okay, I’m not supposed to say that.

They are actually to be called New Board Pro and New Board Premium, not trash boards. The fact that they will appeal to the trashiest of new listings is of no consequence, none at all, absolutely.

Of these two, the big emphasis is on the New Board Pro, which will be available only to investors who have securities portfolios worth at least HK$8 million (US$1.025 million).

It will cater to “New Economy” listings, it will accept “pre-profit” companies, they will be subject to “no track record requirements”, their minimum size will be an “expected” market capitalisation of HK$200 million, the listing approval will be “light touch” and they will be allowed “WVR”, which stands for weighted voting rights.

In short, you will need a microscope to find any listing standards here at all. Come one, come all, and if your business is indistinguishable from the contents of a certain kind of bin, well, the chief executive’s HKEX stock options don’t stand to lose, at least not before he is due for retirement.

Take just this WVR business, the notion that we abandon the principle of one share, one vote, and allow corporate tycoons to have voting control with very few shares, or even none at all.

The HKEX paper specifically recognises that this practice may allow poor management to perpetuate itself and to rob shareholders.

The paper also cites the findings of a survey by the Asian Corporate Governance Association, as quoted in an earlier HKEX study, that investors would apply an average 13 per cent discount to Hong Kong stocks if the exchange allowed it.

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But in the very next paragraph, the paper concludes that “we do not see any factual or analytical basis to this argument.”

One’s jaw drops. What? Would the writer of this arrogant scorn of investors’ interests care to join the flat earth society next?

Or take the notion of a “light touch” vetting process. It means that the New Board Pro will allow controlling shareholders of a new listing to sell all their stock as soon their lock-up period expires and then treat the listing as a shell company.

The exchange has hitherto fulminated against this scandalous practice, but not on the New Board Pro. You thought the Wild West was wild, did you? Wait till you see the Wild East.

And just what constitutes a New Economy company? From what I can make out, it must have sex appeal, however defined -- an overpriced stock, promise much but deliver little, and name itself “tech”, “digital” or “cyber”.

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No, sorry, I got that wrong, not the “cyber” any longer. That was the 1999 tech bubble.

And would Amazon.com qualify as a New Economy company? It has just bought a big American supermarket chain, Whole Foods, an archetypal Old Economy company. What is it now? Would we split a listing here, half old board, half new board?

There is a lesson to be learned here. Leave aside that it is a dubious practice to have a stock exchange go public on its own boards, we should not again include massive stock options on that stock in the chief executive’s pay package.

It incentivises him to focus on short term rewards at the expense of the exchange’s reputation. The evidence of it leaps out at you from every word of this consultation paper.