Sat, Jun 20, 2015 - Page 9 News List

Hong Kong boom-to-bust stocks show challenge of China link

Analysts say the Shanghai-Hong Kong Stock Connect trading link has amplified speculation and investor risk, with a raft of companies’ shares showing extreme volatility

By Kelvin Chan  /  AP, HONG KONG

Illustration: Tania Chou

Wild gyrations in Hong Kong share prices are raising concerns that a new trading link with mainland China is a conduit for questionable trading practices that could undermine the territory’s reputation as a center of global finance.

At least four companies that climbed to dizzying values in only a few months have come abruptly crashing down in the past several weeks for reasons that remain unclear.

The strange trading patterns have gripped Hong Kong’s financial community with a narrative of paper fortunes built quickly and then wiped out in an even shorter time.

The most high-profile case is Chinese solar panel maker Hanergy Thin Film Power Group, now under investigation by the market watchdog. Also affected are two Hong Kong-listed units of Chinese billionaire Pan Sutong’s (潘蘇通) Goldin conglomerate involved in horse breeding and wine trading. The most recent is Digital Domain Holdings, whose main business is a California special effects firm founded two decades ago by Titanic and Avatar director James Cameron, who no longer has a stake after it went bankrupt in 2012. It is perhaps best known more recently for creating a hologram of deceased rapper Tupac Shakur to perform alongside Snoop Dogg at a California music festival. In a little over two months, the shares soared ninefold and then abruptly plunged last week to one-third of their peak.

Market watchers say a tide of money sweeping in from mainland China following the launch of the Shanghai-Hong Kong Stock Connect trading link last year has amplified speculation and increased risks for investors. The link allows investors in each city to trade on the other city’s exchange. Hanergy and the two Goldin companies are among 286 stocks Chinese investors can buy via the link.

“The recent developments have sparked concerns about new dynamics that our regulators need to deal with,” Asian Corporate Governance Association Hong Kong research director Michael Cheng (鄭孟揚) said. “We hope that it will be the two markets upping the game for each other, but with the recent developments, we have a genuine concern that there’s a real risk of a race to the bottom.”

Recent price swings are “unprecedented” in Hong Kong, he said.

The territory, along with London, New York and Tokyo, is a key global financial center, a status underpinned by the reputation of its legal and financial systems which are based on the laws of its former colonial ruler, Britain.

Local traders say the market turbulence is a sign of the larger stock trading frenzy spilling over from China, where the Shanghai benchmark has more than doubled in the past year in a boom powered by borrowed money and a stampede of rookie traders.

Nine of the Hong Kong exchange’s 10 busiest days on record were in April or May as trading on the link surged to a high. After a quiet start, the value of Chinese trades in Hong Kong via the link jumped to US$30 billion in April, out of US$490 billion in total stock market turnover. In May it eased to US$13.2 billion out of US$374 billion.

Experts believe the companies most susceptible to manipulation are those with a relatively small amount of freely traded stock, known as the free float, making them more volatile.

Hong Kong’s market regulator, the Securities and Futures Commission, last week warned that Goldin Properties Holdings stock could “fluctuate substantially” and investors “should exercise extreme caution” because its Chinese billionaire owner and 13 other shareholders own more than 95 percent of outstanding shares.

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