No answers in Hong Kong share probe

Some investors have called the report 'a white wash'

By Stephen Vines In Hong Kong

No one was really to blame for the panic that greeted a Hong Kong Stock Exchange proposal to de-list penny stocks, an independent report has concluded.

In July almost $1.3bn was wiped off the price of penny stocks overnight when the Hong Kong Stock Exchange proposed de-listing shares trading at below $1 Hong Kong (12 US cents).

If implemented, the proposal would have meant removing around half the companies listed in Hong Kong.

The plan sparked a panic and was withdrawn within a couple of days.

The government then established an independent inquiry to find out what went wrong.

Clumsy?

Generally speaking inquiries of this kind are expected to point the finger of blame.

Tung Chee-hwa declared the report a great success

But despite having compiled a 181 page report the two-man panel established to get to the bottom of this debacle found that no one was really to blame.

But they conceded that there was something rather clumsy about a plan that was bound to frighten investors, especially as it came with no proposals for safeguarding the interests of minority shareholders.

The panic that followed was fairly predictable.

'Whitewash'

The only real criticism levelled in the report was directed at Kwong Ki-chi, the Chief Executive of the Exchange.

He was not exactly held personally responsible but it was suggested that he should accept responsibility on behalf of the exchange for the way in which the plan was announced and for the faulty consultation process.

Investors who lost money, politicians and various other people in the investment community, were far from satisfied with this report which was rather predictably described as a white wash.

They were particularly angry because the government was absolved of all responsibility.

This is curious because Fred Ma, the minister responsible for financial services, admitted that he was given the proposal before it was announced but that he had been too busy to read it.

Although cleared by the report, he issued a public apology after its publication.

Dilemma

Tung Chee-hwa, Hong Kong's Chief Executive who appointed the inquiry team, declared the report to be a great success and evidence that his recently launched scheme for the enhanced accountability of government officials was strengthened by this investigation.

Mr Tung's political opponents don't quite see it this way.

The problem is, as the report points out, that the stock market is regulated by three bodies, the stock exchange itself, the watchdog Securities and Futures Commission and the government.

Having pointed out the dilemma, the report does not suggest that the regulatory system should be significantly changed.

Credibility undermined

Meanwhile, the problem of a stock exchange stuffed full of penny stocks persists and investors are left wondering what to do about their penny stock holdings.

No one seriously questions the need to enhance the quality of the local exchange but the clumsy way in which the authorities sought to achieve this has left it with a much harder task.

For years Hong Kong officials thought that they would be able to create a world class stock exchange by making it as big as possible.

They now realise that although size is important, big league international investors want quality stocks, good regulation and high levels of liquidity.

As matters stand it is not going to be easy achieve these objectives, especially now that the credibility of the exchange's management has been badly undermined, and it appears that there is no price to pay for high level bungling.