What If Hong Kong Were Exclusively High-End Restaurants?
July 9, 2023
Imagine a scenario where all of Hong Kong comprises only high-end dining establishments, with no Hong Kong-style cafe (Cha chaan teng) in sight. How would such a society function?
A thriving society cannot be exclusively composed of upscale restaurants serving the affluent; it requires Hong Kong-style cafe to cater to the diverse needs of all social classes. Even the high-speed rail offers both first and second class accommodations! Similarly, institutions like the Jockey Club and casinos provide various betting table sizes and waiting areas.
One need not travel abroad to observe stock exchanges that exclusively feature "unicorns"—companies under a decade old with valuations exceeding $10 billion—while neglecting the essential small and medium enterprises (SMEs) that form the backbone of the local economy. Recently, the CEO of a regulatory agency emphasized the necessity of enhancing the quality of penny stocks and addressing fraudulent activities. This insinuates a troubling past where penny stocks, quality, and fraud were intertwined. Such policies exhibit clear bias, systematically discriminating against smaller firms by continuously elevating listing criteria and requirements. For those small enterprises already listed, it often feels as though they are viewed as "criminals." If their business falters and stock prices drop, they are effectively forced out of the market. The penny stock crisis of 2002 serves as a cautionary tale; history often repeats itself.
The primary role of a stock exchange is to function as a financing platform, where "investors" and "speculators" coexist. If everyone were solely an "investor," from where would the market's fluctuations originate? Regulations in the primary market have tightened considerably, and the restrictions surrounding margin financing in the secondary market have intensified. Are we truly advocating for a market so sanitized that it eliminates risk altogether? Do we require a risk-free stock market before allowing participants of all sizes to engage?
When examining global stock markets, one cannot ignore the issue of commissions—a significant concern. The various fees in the U.S. market are at least 3.5 times lower than those in Hong Kong! Numerous large-cap companies are listed in both Hong Kong and the U.S.; why should investors incur high fees in Hong Kong for identical stocks? Consider the recent surge in the Japanese stock market reaching a 30-year high and India achieving a new record. It’s difficult to believe that Hong Kong's market can avoid decline.
Listing requirements in Hong Kong mandate that companies demonstrate three consecutive years of profitability, a market capitalization of $500 million, and a net profit of at least $35 million in the final year—an imposing threshold, especially during the recent pandemic. The ongoing costs associated with being listed can amount to several million dollars annually. For large enterprises that fulfill all these criteria, Hong Kong is not the sole option for going public. Additionally, the high trading costs and complex margin financing regulations in Hong Kong's secondary market hinder the trading volume of listed companies. The price-to-earnings ratios of stocks across various sectors, and even identical stocks listed in different locations, are among the lowest globally. After a company goes public, aside from the initial capital raised, it often needs to leverage its status to refinance (through bonds, placements, or new share issuance). However, with regulators condemning penny stocks as "criminals" and the overall atmosphere in the Hong Kong stock market being dismal, small and medium-sized listed companies are deprived of this refinancing opportunity. If a company seeks transformation, it continues to be perceived as a "criminal," unable to pivot effectively.
Moreover, regulators should not presume that large unicorns will inevitably choose to list in Hong Kong. Due to the lack of competitive advantages and the insufficient number of investors to fully subscribe (a primary concern), many large firms may choose to forgo Hong Kong or repeatedly postpone their listing plans, leaving victims in their wake! It is entirely possible for Hong Kong to fall out of the top ten rankings.
It is hardly surprising that Indonesia's emerging stock market has surpassed Hong Kong; it is conceivable that Hong Kong residents may eventually seek work in Indonesia as "domestic helpers."
If I were a major brokerage, fund, or institutional investor, I would consider several factors: (1) the rising geopolitical tensions affecting Hong Kong; (2) the sudden withdrawal of listed companies with no consequences for margin interest borrowed, unlike in the U.S., where class action lawsuits provide protections; (3) the abrupt disappearance of certain industries leading to plummeting stock prices without warning. Who would have faith in the Hong Kong stock market?
A netizen aptly remarked, "As a 'small shareholder,' I would invest in penny stocks knowing the risk of total loss, but I understand the 'rules of the game': 'company share issuance,' 'shell buying and selling,' 'start-up companies transitioning to the main board'—these present opportunities for small shareholders to strike it rich. Betting small for a big win is even more thrilling than wagering on horses. However, these 'opportunities' in the market have dwindled, forcing me to invest in tech stocks with inflated price-to-earnings ratios, resulting in last year's collapse with no recovery. Is the 'support' from authorities transforming into 'harm'?"
Today, the adage holds true: if the water is too clear, there will be no fish. Both large and small investors are gravitating toward the U.S. It is my hope that a comprehensive review of the overall development and regulation of the Hong Kong stock market will take place, allowing for further discussion in the near future.
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association