Activist financier calls Hong Kong marketplace rout

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HONG KONG Six weeks ago, David Webb, an romantic financier and former executive of a Hong Kong exchange, released a news patrician “The Engima Network: 50 bonds not to own”. On Tuesday, many of a shares he named abruptly plunged, indicating to ongoing regulatory problems over small-cap shares in a Asian financial hub.

Webb’s news mapped out a formidable web of cross-shareholdings between companies listed on both a categorical house and a sibling, a Growth Enterprise Market, that he pronounced combined a tact belligerent for volatility.

Tuesday’s biggest decliners showed characteristics that have prolonged disturbed regulators and that Webb highlighted in his report: high shareholding concentrations, impractical valuations, and formidable relations between companies and listed brokerages.

The Hong Kong supervision and regulators are flourishing increasingly endangered that a array of association scandals, many of them centered on mainland companies listed in Hong Kong, have tarnished a territory’s repute as a financial core as it outlines a 20th anniversary of a handover to China this weekend.

Webb, a successful financier and author who complicated arithmetic during Oxford, told Reuters on Wednesday he had come opposite a network by his possess investigate into annual reports and association disclosures.

“I picked adult on this network years ago when they started building it. The meltdown shows these bonds are closely related,” he said.

His news usually covers cross-shareholding relations though a companies also have many directors in common as good as associated transactions, Webb said.

The purpose of such networks, Webb said, “is to deceive investors – remove and misemploy income and partial of that involves utilizing stocks.”

‘DUMP AND RUN’

Webb, an outspoken censor of a Hong Kong marketplace given he quit a HKEX house in 2008, pronounced it was misleading what triggered Tuesday’s sell-off.

“I can usually speculate. But it’s probable domain calls have been triggering a sell-off. It’s probable a brokers concerned have been told to stop lending opposite those shares … Maybe a people handling a network have motionless to dump and run.”

Webb pronounced he never shorts Hong Kong shares.

“The bigger design here is that this again reminds us that a stream regulatory complement is not operative and these problems have been authorised to build adult by a Hong Kong sell (HKEX).” He also blamed a eccentric marketplace regulator, a Securities and Futures Commission (SFC), “for not interlude it.”

An SFC orator declined to criticism on either a regulator was questioning any of a companies in a network.

In a statement, a SFC said: “The bonds that have gifted vast cost declines yesterday occupy a marketplace shred characterized by skinny turnover, tiny open floats, high shareholding concentrations, and mixed relations between opposite companies and listed brokerage firms. These characteristics can be generally gainful to impassioned sensitivity and also to marketplace misconduct.”

The sell denied conjecture on Tuesday it was formulation to delist thinly traded shares.

WLS Holdings (8021.HK), that had a marketplace value of HK$409 million, was a biggest crook on Wednesday with a shares shifting 47 percent, while Greaterchina Professional Services Ltd (8193.HK) forsaken 34 percent after a 93 percent dump on Tuesday.

REFORM IDEAS

Webb pronounced he against a new HKEX offer to supplement a third board, catering to start-ups, and argued a dual existent play should be joined and put underneath a office of a SFC.

The financier romantic pronounced Hong Kong also needs a category movement authorised sustenance so investors can reason play accountable. He pronounced all companies should be compelled to record formula on a quarterly basis, with restrictions on how most companies can deposit in other stocks.

Webb, a member of a SFC’s takeover panel, has been a thorn in a side of a investiture and Hong Kong’s mega-rich business elites by his open explanation and eponymous “Webbsite” for most of a past 26 years he has been proprietor in a city.

Last year, however, Webb told readers of his newsletter he would dial behind his explanation and open activism in disappointment that his efforts had yielded small change in a financial heart over a years.

The HK$28.6 trillion ($3.7 trillion) marketplace has grown nine-fold given a former British cluster reverted to China order in 1997, mostly on an liquid of listings from mainland firms. They now make adult two-thirds of marketplace value and paint 90 percent of a supports lifted from IPOs in a 5 years to 2016.

Investors seem to bonus a market, with a Hang Seng index .HSI trade during around 14 times earnings, contra 22 times for universe bonds and 23 times for U.S. equities.

The SFC, along with a Hong Kong batch exchange, have released several warnings over strong shareholdings in penny bonds listed on a GEM. The normal first-day cost arise for a GEM association entrance during a initial half of 2016 was 454 percent due to such concentrations, SFC information shows.

This month a HKEX launched a wide-ranging conference to try to residence this problem, including a offer to lift a smallest marketplace capitalization by 50 percent to HK$150 million and augmenting a money upsurge requirement for initial listings.

(Reporting by Michelle Price; additional stating by Donny Kwok in Hong Kong; Writing and modifying by Bill Tarrant)

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