Jake's View

Proposed third board will just lower listing standards

A third board on the Hong Kong Stock Exchange would perform even worse than the existing second board, the Growth Enterprise Market

PUBLISHED : Sunday, 14 May, 2017, 1:35am
UPDATED : Sunday, 14 May, 2017, 1:51am

Hong Kong is up for another round of market reform as the stock exchange will solicit views from the public at the end of the month for a new board to allow more technology firms like Alipay and Lufax, as well as foreign giants such as Saudi Aramco, to list here.

Business, May 11


If stock exchange chief executive Charles Li Xiaojia has decided to jump the gun in his race to lower listing standards in Hong Kong then it is time for others to come off the blocks too.

Jump the gun because the consultation paper on setting up a third board has not yet been published. Mr Li should in decency have waited with his puff talk until the rest of us can read it.

Lower listing standards because this is exactly what the proposal will do. Yes, it may be presumptuous of me to be so certain when I have not yet seen the paper but if the exchange had any fresh ideas we would long ago have heard of them. All the old ones are about lowering standards.

Our exchange already suffers from two notable weaknesses where standards are concerned, particularly in listings of foreign companies, and there is little we can do about them.

HKEX to begin consultation for a new third board end of May

The first is that Hong Kong is a pipsqueak on the international regulatory map. Our Securities and Futures Commission simply does not carry much weight beyond our borders.

This is particularly true in respect of the mainland companies listed here, now the majority on our exchange, both in size and number. Their front-line regulator, the mainland’s China Securities Regulatory Commission, is traditionally more concerned with promoting their interests than regulating them.

The SFC pulls off an occasional win when their malpractices are simply too outrageous but its relations with the CSRC are never quite as tight as it likes to claim. This is particularly worrisome because of the growing murkiness of off balance sheet financing on the mainland.

The second weakness is that investors who have been cheated have few avenues to direct redress here. In the US they can join class action lawsuits and deal with their lawyers through contingency fee arrangements whereby they only pay if their lawsuits are successful.

But Hong Kong’s most militant trade union, the Brotherhood of Solicitry, Barristry and Judiciary, is absolutely opposed to any reform of its 17th century practices. This means you can only take your case to the law if you are very rich.

The big question to ask is just who this proposed deformation (reform hah!) is meant to serve and here we have another notable anomaly. Our exchange is listed on its own board and a huge slice of the chief executive’s pay comes in the form of share options.

He has a definite interest in goosing turnover on the exchange by dropping the standards and taking in all comers. He will have moved on by the time it all goes wrong; so much for the exchange’s previous good reputation of mobilising savings for the benefit of both investors and our local economy.

This is more than just conjecture. The chart shows you the relative performance of our existing second board, the Growth Enterprise Market, against the Hang Seng Index over just the last 16 months. It has been the trend since the GEM was set up 17 years ago.

A third board will do even worse. Be sure of it.