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Two years after Hong Kong’s securities regulator vowed to nip irregularities in the bud, flash crashes are still plaguing the world’s fourth-largest stock market.
This year’s wave rivals the notorious “Enigma Network†that prompted the last bout of regulatory hand-wringing in 2017. In mid-January, Chinese real estate developer Jiayuan International Group Ltd. plunged without warning, triggering a $4.8 billion selloff in small-cap stocks. Then, circuit-board maker Camsing International Holding Ltd. tumbled a record 80 percent after the company said Chairwoman Lo Ching was in police custody in Shanghai. On the same day, a number of other small stocks, including Beijing Sports and Entertainment Industry Group Ltd., crashed for no apparent reason.
Shares of some newly listed companies on the market’s main board have also undergone sudden collapses. In late April, Fullwealth Construction Holdings Co. dived 82 percent only six months after listing. About two weeks later, KNT Holdings Ltd., which went public in March, tumbled 75 percent.
Cross-shareholdings between companies — or even links such as board members in common — can sometimes explain the contagion, as in the case of the Enigma Network of 50 stocks highlighted by shareholder activist David Webb. In January, Sunshine 100 China Holdings Ltd. followed Jiayuan lower; the developers share one board member.
There are other red flags. Fullwealth and KNT were both subject to so-called concentra-
tion warnings by the Securities and Futures Commission before their flash crashes. When ownership of a company’s stock is concentrated among a small number of shareholders, the price can “fluctuate substantially†even with a small number of shares traded, the regulator said.
Such mechanical rules aren’t sufficient to screen out all potential problems, though, because Hong Kong simply has too many penny stocks — those with a share price of less than HK$1 (12.8 cents). These have low liquidity and limited transparency. More than 480 penny stocks have zero coverage by sell-side analysts, data compiled by Bloomberg show.
This is by no means a small subset. Penny stocks account for roughly 20 percent of Hong Kong’s stock universe and boast about $60 billion in total market cap. They’re also a dangerous bunch: In the past year, the group reported a combined $6 billion in net losses.
Brokerages are understandably unwilling to cover these stocks because they don’t generate enough trading business. But even short sellers such as Muddy Waters LLC shy away from this dark corner of the market, preferring to take on bullish sell-side analysts over companies such as Anta Sports Products Ltd. The reason is simple: Penny stocks don’t offer enough liquidity.
After the Enigma crash in the summer of 2017, I noted that major exchanges in the US have clear rules on penny stocks. Companies on the New York Stock Exchange, for example, face delisting if their shares drop below $1 for 30 consecutive days. Two years on, Hong Kong still has no such safeguards.
As part of its push for a “front-loaded regulatory approach,†Hong Kong has directly intervened in 78 cases, pre- and post-IPO, in the past two years to tackle market irregularities, the SFC said in its latest annual report. The number of new listings in the construction sector — where shell companies such as Fullwealth tend to reside — has decreased, the regulator noted in a November presentation.
—Bloomberg