Outcome of Hong Kong listing turf war will be city’s most important change in corporate governance

PUBLISHED : Thursday, 18 August, 2016, 6:47pm
UPDATED : Thursday, 18 August, 2016, 6:47pm

Speak a little truth and people lose their minds. No one expected a turf war when the Securities and Futures Commission (SFC) and Hong Kong Stock Exchange (HKEX) jointly launched a three month consultation in June to collect views from the market on amending the listing procedure.

Under the proposals, a listing regulatory committee and a listing policy committee, with equal representation from the SFC and HKEX would manage the approval process. Sharing power over HKEX’s monopoly powers and even the mere hint of restricting new listings provoked rebukes from vested interests.

In an interview with the SCMP, Lo Ka-shui, vice-chairman of the Chamber of Hong Kong Listed Companies, who is also chairman and managing director of listed property developer Great Eagle Holdings, said, “The proposal to let the regulators determine which companies should be listed will move Hong Kong backwards, while the world’s other markets are all moving to a disclosure based regime. A regulator-based regime would not promote market development and our stock market will be further stifled which would be damaging to Hong Kong as an international centre.”

Christopher Cheung Wah-fung, the incumbent lawmaker representing stockbrokers opposed the reforms, purporting they might lead to a significant drop in initial public offerings in Hong Kong. “Many brokers are worried their rice bowls may be broken,” he said.

The “iron rice bowl” mentality will only lead to HKEX returning to its casino days when the exchange was an assembly line for speculative ammunition rather than a capital market. An international and historical perspective is needed in this consultation rather than a duty to filling iron rice bowls.

One of the problems of applying this local village mentality is it hinders HKEX from evolving. Instead, a slavish devotion to maximising the exchange’s monopoly only blinds it to manifest challenges.

China’s economic and financial importance has resulted in the HKEX becoming the world’s largest and probably most important stock exchange. What the exchange and regulators must comprehend is that China and Chinese companies pose a dilemma never before encountered in capital markets: it is the world’s second largest economy while at the same time an emerging market. This means that HKEX will host some of financial history’s biggest listings along with the biggest regulatory headaches.

Instead of opening the throttle on new listings, HKEX needs to worry about its existing listing regime. Abuse of backdoor listings on the GEM and main board has exploded into an underground, shadow capital market. Billions are being made harvesting listed shells for mainland businesses who won’t subject themselves to a formal listing process.

I talked to a CEO and board member of a listed company who had sold out their shell to mainland interests. Besides all the asset shuffling, he complained about having to sign cheques for hundreds of millions of dollars without knowing who and what they were for. So the HKEX ends up being a new platform for money laundering.

Even greater financial disclosure doesn’t improve the governance situation. It actually sends a hypocritical message – that regulators are so unsure of certain companies that they can only ask for more disclosure and decline responsibility for regulation.

Enforcement of legal claims on mainland Chinese companies is already impossible, but weakened corporate governance and listing structures will only make it more impossible and corrode the reputation of HKEX.

Abuse of backdoor listings on the GEM and main board has exploded into an underground, shadow capital market

A new listing committee, amended rules and standards would still fail to address enforcement issues. Disclosure, transparency and independent directors are important. But, HKEX and SFC can only censure and sanction companies and directors. They cannot take the kind of civil and criminal action that the US SEC can. Enforcement of investors’ legal claims against mainland Chinese companies remains a serious problem. The problem of enforcing judgements in China is not going away.

More disclosure in only useful in the more aggressive US investor relations environment. A free court system and a large cadre of lawyers support minority shareholders’ legal actions. Numerous agencies monitor the corporate governance of listed companies. Many activist shareholder sites and blogs watch over the market by investigating abuse and malfeasance.

Hong Kong shareholders cannot depend on shareholder derivative actions, class action suits, which are much more common in the US. Taking the listing approval process completely out of the authority of HKEX and removing their inherent conflict of interest between seeking more listings and regulatory authority is perhaps the best solution for its dilemma.

How the SFC and HKEX reconcile these issues will represent the most important change in corporate governance in the history of the Hong Kong stock exchange.

Peter Guy is a financial writer and former international banker