HKHSI and NASDAQ Downturn (5/5/2000)

Major Correction in the Horizon (4/15/2000)

Prof. Kai Keung Mark is a retired professor, Dept. of Biology, The Chinese University of Hong Kong and Dept. Head and Principal Lecturer, Dept. of Science, Hong Kong Institute of Education. He has three biotechnology patents. He uses his understanding of high technology to forecast market movements . He has published 13 articles in Financial Trend, and leading Hong Kong stock analysis journal plus many other Mark's letters since 1987. His prediction reliability rate reached 80%. He accurately predicted the October crash (10/18/87), the bottom level of 1990(3/5/90), the peak level of 1994 (5/11/92), the peak level of 1997 (2/12/96), the peak level of 2,000 (8/22/99), the peak in March 2000 (2/20/2000), and the bottom in September, 2001.

HK stock market was saved from avalanche

July 31, 2002 

On July 25 (Thursday) 11:30 am, the Hong Kong Stock Exchange and Clearing office announced a proposal to delist those small stocks with a trading price of HK$0.50 or lower. This affected 386 stocks or 48% out of the total 798 stocks before the panic selling. Stocks with a floating asset (current share price times number of shares issued) of less than 50 million HK dollars were the main targets. The proposal created a panic selling of penny stocks. On July 26 (Friday), some of these stocks dropped for 87% in one day. wiping out 10 billion dollars of assets from these companies.  An avalanche of the HK stock market was imminent.  

Fortunately,  Mr. Frederick Ma Si-Hang ( Secretary for financial service and treasury)  coordinated decisively a resolution to suspend the crucial part C of the proposal, resulting in a market recovery. Otherwise, an avalanche of the small stocks on Monday was certain.  It is the first time that the SAR Government can make a bold and decisive action to avoid a crisis.

Reviewing the SFC announcement, there are many flaws in the proposal:

1. The stock exchange officials should have a deep understanding of stock market behavior. Investors act mostly on future outlook, and few would wait for the news to be confirmed. Just announcing it as a proposal could have serious impact on the investors, who would be victimized by such action.
2. The announcement was untimely when the HK stock market is already badly battered by the downfall of US and other markets. So, investors were extremely nervous. Even under a bull market, few investors could face total liquidation of their shares.
3. Any announcement that might drastically affect the overall market should be made after Friday market close when investors can digest the content better.  However, the announcement was made on 11:30 am on July 25, right in the middle of the trading session. This action was against the practice of prohibiting any news release that may affect any single stock during trading hours. The practice by individual companies would have been disallowed by the Securities and Futures Commission. On releasing such vital information, SFC violated such rule themselves.
4. The proposal was badly organized and packaged, and the wording was quite misleading to the common people who were unfortunately also the targets of the announcement. The general impression on the initial reading was that all the stocks that traded at price below $0.50 would soon be delisted,. But in fact only those with floating assets of less than $50 million would have been affected. A great proportion of these 386 shares (before the panic sell-off) did have a floating asset above the critical 50 million dollars. So merging of shares would solved the problem without delisting. It is only a small proportion with floating asset below 50 million dollars that would be more difficulty to be saved under the proposed rules. If the emphasis of the consultation paper only targeted these shares, the market would have reacted differently, and should not create such panic.
5. The proposal failed to provide a fallback solution for the investors to recover their investment after delisting (like the OTC-BB in the US market). This should be an essential piece of information for such proposal. Delisting in Hong Kong is rare, but the few cases did portray the picture that the stock investment went down the drain when it was delisted. This common impression induces panic selling by small investors to salvage any residual value instead of zero.
6. The thin trading of small stocks during bear market is normal. While it is true that the extensive fall of some 500 shares only account for 1-2% of the total market volume, to the investors of these stocks, it is a fatal blow.

In summary the way the proposal handled the delisting of small shares was imprudent with regard to overall market operation and investor interest. It should never happen again.