When I began writing markets columns for Bloomberg Opinion (then called Gadfly) in 2017, my first piece was on Hong Kong’s enigma network, a complex web of companies with cross-shareholdings identified by activist investor David Webb.
Webb, who died last week at the age of 60, was a rare Robin Hood in a region where local tycoons have outsize influence and questionable corporate governance is commonplace.
The billion-dollar question we are left with is who will pick up Webb’s baton, fighting for minority shareholders and exposing shady business dealings? The need for a tenacious watchdog is all the more pressing now that Hong Kong has entered a bull market, giving company insiders cover to pump and dump stocks and subjecting illiquid small-caps to flash crashes.
Not a business insider, Webb relied only on public information to painstakingly map out the money trail. Among his many accomplishments, his biggest was maintaining the Webb-site, which contains free online databases of company shareholdings and board compositions.
Using these tools, in 2017, Webb spotted what he dubbed the enigma network — “50 stocks not to own” because of their intertwined inexplicable investments in each other. The following year, he shed light on China Huarong Asset Management, the state-owned bad-debt manager, and its extensive dealings in Hong Kong, including providing equity-linked loans to shell companies with questionable investments.
When chairman Lai Xiaomin (賴小民) was investigated for corruption and removed from office in late 2018, stocks associated with Huarong tumbled. Webb showed how to invest — or at least avoid land mines.
In hopes that his site would live on without him, Webb said he tried handing it over to the University of Hong Kong along with offers of substantial donations to support it, only to be turned down.
In theory, Webb’s work can continue. With the advent of generative artificial intelligence and coding tools from the likes of Anthropic, even a finance professional not steeped in computer science can write programs to maintain and update databases on Webb-site.
The more tricky part is who wants to perform the public service? Webb was laser-focused on small-cap companies, the ignored corner in Hong Kong’s US$6.5 trillion stock market. Among the entire universe of 2,780 listed firms, only 25 percent have analyst coverage and about two-thirds are micro-caps, or those with a valuation of less than HK$2 billion (US$256.45 million).
Brokerages certainly have no interest, because the stocks do not generate enough trading business. Short sellers are likely to stay away as well, preferring to take on high-profile companies that garner media interest instead. That is because small stocks simply do not offer enough liquidity to make it financially worthwhile.
Granted, Hong Kong’s regulators have gotten better at tackling market irregularities. Starting in 2023, the Hong Kong Securities and Futures Commission required brokers to assign a unique ID to each of their clients, known as a Broker-to-Client Assigned Number (BCAN), and tag the ID to all their securities orders, in an attempt to track and deter market manipulation.
However, there is just so much BCAN can do. In Webb’s view, one reason why Hong Kong is prone to sudden stock plunges is that investors are in the dark about the share pledges made by controlling stakeholders.
Hong Kong’s small-cap space has continued to periodically suffer from sudden and steep price declines long after Webb stepped back from his in-depth research in 2020 following his cancer diagnosis.
For example, on April 9, 2024, China Tianrui Group Cement Co lost almost all of its value after brokers’ margin calls and forced selling of the founders’ shares. Investors only found out when it was too late.
Until the government develops enough political will to confront the influential banking industry and change disclosure rules, there is a continued public need for an updated Webb-site.
For example, using a database that Webb designed to analyze movements of large blocks of shares among banks and brokers, investors can make educated guesses about company insiders’ stock pledges.
Many in the investing community have the ability to do what Webb did, but few have the altruistic intent, which made the banker-turned-corporate-governance champion all the more special. Who will step up and be the next gatekeeper?
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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