Jake's View

Hong Kong’s penny stock woes will only worsen with the exchange’s new board

PUBLISHED : Wednesday, 28 June, 2017, 6:57pm
UPDATED : Wednesday, 28 June, 2017, 10:59pm

Shares of more than a dozen Hong Kong-listed companies, most of them penny stocks, plunged more than 50 per cent yesterday morning ... -- Business, June 28

This is not the first time that penny stocks have been threatened because they give the Hong Kong stock market a bad name, far from it.

But get ready to see the headlines feature this story again and again if the exchange’s chief executive, Charles Li Xiaojia, gets away with his proposal to create a new hurdle-free trash board on the market.

His idea is to return to the old four-boards market we used to have before 1986, three boards of which, including the existing main board, he would be just as happy to see go away and not bother him any more as long as he can have his new trash board pro for high flying high tech stocks.

It will be for “New Economy” companies, an ill-defined catchphrase, it will list “pre-profit” companies, which ignores the question of how they can be sure that they ever will be profitable when such startups rarely are so, and it will require no track record of applicants, which is as much as saying most of them will indeed be of this dubious pre-profit nature.

In addition, there will be no lower limit on size. Applicants will need only an “expected” market capitalisation of HK$200 million.

Who expects? I could list my hobby of making scale model sailing ships on this board by saying I expect it to be worth HK$200 million. You can do this, too, for any pursuit of your own. Just say the words “I expect”.

If this is not enough to let you know that there will be no minimum requirements for listing, Charles Li also tells you that listing approval will be of the “light touch.”

And he has given you a clue on what this might mean in his consultation document on the trash board. It means if that if you list a company on the board and then sell out all your own stock as soon as you can, leaving outside shareholders in the lurch, well, that’s just fine by him.

Then we get weighted voting rights. Our investment democracy of one share, one vote is to be trashed. You can have 100 per cent control of any company you list on the trash board while not putting up a single cent for any ordinary share. It is allowed in New York, you see. Americans are great believers in democracy.

But perhaps the most pernicious feature of the trash board, and one that has not yet been widely noted, is that, while supposedly restricted to “professional investors,” this term is defined in Hong Kong as people with a portfolio of more than HK$8 million.

This does indeed rule out the poverty stricken who are ignorant outright of financial affairs, but then no broker or option-endowed exchange executive wants to deal with such penny investors anyway. They are far too much trouble. Penny stocks, yes, but penny investors, no.

But HK$8 million still qualifies a very large number of people who are sitting on unrealised profits through the ownership of their flats, and who are by no definition investment professionals. If they sell out, they can immediately play on the trash board.

This is pernicious because anyone wishing to establish a stock exchange designed to trap large numbers of people in failing, moribund stocks could do no better than to copy the trash board in every detail.

Elsewhere, the definition of professional investors is much more comprehensive. The United Kingdom, for instance, makes intermediaries responsible for dealing only with clients who know what they are doing. The onus of making sure of this is on the intermediary.

Our rules require that intermediaries must be “reasonably satisfied,” but in practice it means nothing. If you have a portfolio of HK$8 million, you are in the water, and every shark is permitted to take a bite out of you. The sharks are absolved of all responsibility and you have no recourse.

If we are indeed to have a trash board, this problem of just who is a professional investor must be sorted out before any other.

But it won’t be, and it’s just one more reason to expect a steady stream of penny stock scandals from the trash board.