Jake's View

Hong Kong stock exchange’s focus on turnover does investors no favours

What the bourse really needs is to exercise a little more care and attention over who is allowed a listing and who is not

PUBLISHED : Sunday, 05 March, 2017, 2:34am
UPDATED : Sunday, 05 March, 2017, 2:34am

HKEX unveils plans to boost turnover

Business headline, February 28

This according to Charles Li Xiaojia, the chief executive of Hong Kong Exchanges and Clearing, who last year was paid HK$44.06 million for his services.

The pay was comprised of salary, performance bonus, retirement costs and, most notably, HK$22.47 million in “fair value” of “employee share-based compensation benefits.”

In other words, Mr Li makes most of his money in the form of shares that the board of HKEX grants him. Admittedly, he does not just get these straight out. They “vest progressively” so that the longer he stays in the job the more he picks up.

Since the beginning of 2015 he has received 211,984 shares. With the share price at the HK$192 level these shares alone are worth about HK$40 million. But he has also held this job for more than seven years and I think it likely that he was always richly encouraged with share grants.

Now there are good many people who, paid so well, would say that they have more than enough to meet all their needs and caprices and will not push themselves so hard to make more yet.

Given that the board of HKEX has awarded Mr Li these shares as an incentive, however, we have to assume that he is rather impelled to keep grinding away to boost the stock before he jumps to an even more prestigious job or, perhaps, retires in 10 years at the age of 65.

His personal wealth rides heavily on the HKEX share price and this share price rests heavily on turnover on the exchange. Hence his concern with turnover.

This is all very well in normal corporate circumstances, but HKEX is a strange corporate animal. It is, first of all, an exchange that is listed on its own boards, which is not entirely an arm’s length financial arrangement.

HKEX to launch new board consultation in first half after 2016 profits fall on shrinking transactions

It also still has 550 “market participants”, legacy seat holders from the days when there were four stock exchanges. The vast majority of them do very little business but still exert an outsize influence through a functional constituency seat they control in the Legislative Council, and they are invariably dead set against any reforms of the exchange.

Balancing this is supposedly the fact that the government appoints half of the HKEX board. Unfortunately, it does not mean much. Government policy is to encourage the listing of mainland stocks as a service to the motherland.

And therein lies the rub. The writ of our regulator, the Securities and Futures Commission, does not easily extend to the mainland when its mainland counterpart is more concerned with encouraging, than regulating, listings. Accounts of the resulting misfeasance can be read in these pages every day.

Who is left then to speak for investors when the exchange’s executives, its directors and its shareholders, with the consent of its effective regulator, are all gung-ho to stuff it with every listing they can find and then bang the till once a year for their share of the resulting loot?

What HKEX needs is not more turnover. What it needs is a little more care and attention over who is allowed a listing and who is not.

But, no, this is not what Mr Li has foremost in mind. What he wants is a third board with low entry requirements for technology start-ups. The exchange has had a second board of this kind for 17 years and it has been a dismal failure. The stocks on it have seriously underperformed the main board and left many hapless investors stranded with little chance to get out. It has also proved particularly vulnerable to listing manipulation.

And Mr Li’s solution is only more of the same made even worse. I cannot blame him really. It is what his incentives lead him to do. But let us have it straight that this is not in the lasting interests of the exchange or of Hong Kong’s reputation and it is a disservice to investors.