After US$35 billion in market value was erased from three Hong Kong-listed companies over two days, investors are asking if the city’s regulator should have done more to prevent the sudden selloff.
Shares of Goldin Financial Holdings Ltd (高銀金融) and Goldin Properties Holdings Ltd (高銀地產), controlled by billionaire Pan Sutong (潘蘇通), plunged more than 40 percent on Thursday.
A day earlier, Hanergy Thin Film Power Group Ltd (漢能薄膜發電) tumbled 47 percent in 24 minutes before trading in the Chinese solar company’s shares was suspended.
The stocks, which had surged at least 500 percent in the 12 months before the rout, can also be bought and sold by Chinese investors through an exchange link.
The volatility illustrates the need for regulators to keep pace with the boom in China’s stock markets. In Hong Kong, the Securities and Futures Commission (SFC) and the bourse operator share the task of trying to weed out stock manipulation, while also encouraging the equity market to play a bigger role in boosting economic expansion.
“Should the stock exchange focus on business or regulation?” Hong Kong-based Invesco Ltd (景順) chief investment officer for Asia excluding Japan Paul Chan (陳?鉅) said on Thursday. “It cannot promote and regulate at the same time. The current management definitely wants more growth. When retail investors are upset, they protest. When foreign investors get burnt they will never come back.”
While Chinese authorities have cracked down on manipulation and insider trading in an effort to reduce risks as the rally lured a record number of novice investors, the SFC has not publicly stepped up its intervention in the city’s equity market this year. The Hang Seng Composite Index has surged this year as the Shanghai and Shenzhen rallies spilled over and investors bet that dual-listed stock valuations would catch up with their mainland counterparts.
Goldin Financial’s 43 percent drop on Thursday wiped out US$12 billion in market value, while Goldin Properties, down 41 percent, shrank by US$4.6 billion. Hanergy investors lost US$19 billion on Wednesday before the trading halt.
The volatility will hurt individual investors, and Hong Kong’s regulator should take timely action to curb manipulation, according to Niklas Hageback, who helps oversee about US$225 million at Valkyria Kapital Ltd.
“Small-time mom-and-pop investors are going to be badly burned,” Hageback, a partner at the Hong Kong-based money-management firm, said by telephone on Thursday.
The regulators “need to act, if not on the hour at least on the day, and they’re not doing it,” he said.
While SFC chairman Carlson Tong (唐家成) has pledged to clamp down on “any unusual share movement,” he said it is “natural to have a lot of market volatility” following recent capital inflows into Hong Kong’s open market, the South China Morning Post reported on May 13.
Hong Kong stocks available for trading by Chinese investors have gained an average 30 percent this year, compared with a 17 percent advance in the Hang Seng Index, according to data compiled by Bloomberg.
The turnover of Hong Kong shares traded through the exchange link, which opened in November last year, reached a record HK$235 billion (US$30.3 billion) last month, almost sevenfold that in March.
While there might be a need for more oversight, investors should know they will eventually bear the risk of trading stocks, Aberdeen Asset Management PLC Hong Kong-based head of Chinese equities Nicholas Yeo (姚鴻耀) said.
“There’s a lesson to be learned on speculation: Don’t follow the crowd,” Yeo said.
Chinese mutual funds and retail investors are expected to buy an estimated 200 billion yuan (US$32.3 billion) of Hong Kong stocks in the next two to three quarters, UBS Group AG analyst Wenjie Lu (陸文傑) wrote in a note on May 15.
Hong Kong Exchanges and Clearing Ltd chairman Chow Chung Kong (周松崗) last month said the bourse is preparing for a link with the Shenzhen Stock Exchange in the second half of this year, modeled after the six-month-old counterpart in Shanghai.
Hong Kong regulators are too hands-off and need to do more to prevent price manipulation, Bocom International Holdings Co (交銀國際控股) chief China strategist Hao Hong (洪?) said.
“They believe that, because the information is public, it’s up to the investors to read before they buy stocks,” Hong said in an interview in Hong Kong on Thursday. “The problem with this kind of approach is that you can’t fend off market price manipulation.”
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