Date: Tues, December 3 2019
Author: Alexandra Stevenson
Constant and rapid fluctuations within the Hong Kong stock market are as frequent and common as the horse track races, and yet in the recent weeks, we witness three spectacular flameouts.
1. A Chinese marble miner, ArtGo, plummeted by 98 percent in a single day
2. A Chinese automaker-turned-education-company, China First Capital, plunged by 78 percent
3. An education form, Virscend, taking a dip by 33 percent in a single day.
These events within the last two weeks have little to do with the pro-democracy demonstrations that has been fast consuming Hong Kong for the past five months, which sometimes caused gyrations in the local market. In fact, they reveal more perpetual and incessant issues in the market which have been Asia’s financial capital for the longest time. The lax of regulators over dubious practices. Naysayers silenced by rules, whom which might have restrain gullible or overly exuberant investors.
As a result, bubbles inflate regularly in Hong Kong, with startling speed. Then they pop, often leaving small investors with nothing but sheer disappointment.
And yet, despite its political problems, Hong Kong continues to prosper and blossom at the crossroads between China and the rest of the world. According to the World Federation of Exchanges, Hong Kong’s stock exchange stands as the world’s sixth most valuable.
Last Tuesday, Alibaba, the Chinese e-commerce titan, raised more than $11 billion selling shares in Hong Kong. Also, The British lender HSBC, the Chinese internet giant Tencent and a slew of Chinese banks and oil companies have also raised hundreds of billions of dollars there.
However, critics like David Webb, a longtime Hong Kong shareholder activist, mentioned that the local rules keep the market unhealthy. For instance, no disclosure is required when a prominent investor pledges shares in a company as collateral for loan. If the loan must suddenly be repaid, the investor may have to sell a lot of shares hastily, causing the price of the share to plummet.
Hong Kong observes a murky view on short sellers - investors who bet that stocks will dip. While companies normally despise short sellers, they also serve an important role in heady markets by calling out stocks that may be trading at much inflated prices than they should.
Short sellers also create alternatives rather than simply selling shares and walking away. For example, somebody who shorts a $40 stock and expects it to fall to $20, is technically still investing in the stock, although at a lower price. Without short selling, an investor who feels that the stock is worth less has no choice but to sell it, which indicates that the shares are worth nothing.
However, Hong Kong authorities consider short sellers disruptive. They implemented a cap on investors to bet against only a limited number of companies. Punishments were also introduced to those who aggressively question a company’s numbers. In recent years, Hong Kong officials have reprimanded, and fined Moody’s, the ratings firm, and a short seller named Andrew Left, accusing them of inaccuracy in their criticisms. Both disputed the accusations.
A spokesman for the Hong Kong Stock Exchange’s owner, Hong Kong Exchanges & Clearing, refused to comment. Another spokesman, for the Securities and Futures Commission, the territory’s top financial regulator, said it “will continue to monitor the market and will not hesitate to use its statutory power to take action against parties involved in market misconduct where appropriate.”
Other factors keep the market frothy. Hong Kong has constantly lowered barriers for investors in China to cross over and invest. Mainland markets are prone to booms and bursts, more than so than Hong Kong. Experts say those investors bring some of that volatility along.
Hong Kong is now vigilant. Lately, the territory’s regulators warned listed companies not to mislead investors or include “materially false information regarding their counterparties in a transaction.” It also issued a warning to private investment firms after indicating what the regulator described as “dubious arrangement and transactions,” without offering specifics.
The three stocks that recently fell so precipitously were not unnoticed. Mr. Webb, the shareholder activist, had placed all three on a long list of Hong Kong “stocks not to own” after questioning their ownership and stock valuation.
On Thursday, Mr. Webb said, “ArtGo should now be renamed ‘ArtGone,’ while Virscend should be renamed ‘Descend’ and China First Capital should be renamed ‘China Lost Capital,’” in an interview.
The stated companies did not respond to requests for comments.
ArtGo’s stock took off this year, going from around 6 cents a share in January to nearly $2. The company mines marble for table tops and bathrooms and yet investors treat it as more valuable compared to highest-flying technology stocks in view of its share price relative to its earnings.
The surge in value opened up ArtGo’s shares to additional investors. It passed a threshold that would allow MSCI, a company that manages stock indexes, to include it in its China Index. As that index is widely followed by investors, many laymen began to add ArtGo shares to their portfolios.
Following through, on November 20, MSCI reversed its decision. Citing the need for further analysis of ArtGo’s business, resulted in a fall by 98 percent in shares.
Other contenders for the MSCI index have also prompted concerns. An investment company called China Ding Yi Feng Holdings was added by MSCI in the past year after it skyrocketed by nearly 3,000 percent, clearing the MSCI threshold. However, in March, it was under investigation by regulators and its trading was frozen.
In 2018, after much pressure from the Chinese government to include previously restricted stocks trading in Shenzhen and Shanghai markets, MSCI China Index was introduced. MSCI did not respond to requests for comments.
China First Capital’s plunge occurred last Wednesday. The company revealed in a filing with the stock exchange, they were not aware of reasons for the movement and added that a company controlled by its chairman, Wilson Sea, had sold shares in China First Capital that had been pledged as collateral for a loan agreement.
On the same faithful day, shares of Virscend, which is partly owned by China First Capital, took a fall. In China First Capital’s filing, the company said it had sold Virscend shares as part of a collateral agreement. In its own filing, Virscend said it was unaware of reasons for the fall.
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