A group of Hong Kong stocks have lost more than $6bn in a series of mysterious plunges that left the worst of the fallers down 95 per cent – and 13 of them down more than 50 per cent.
The cause of the collective plunges was not immediately clear, but they are the latest in a series of sudden stock swings in the city that have prompted warnings about the dangers of stocks with small free-floats and within that, highly concentrated shareholdings.
One likely trigger could have been a margin call. Pledging shares for loans is common and the dumping of share collateral held by lenders has caused more than one dramatic collapse – most recently the 90 per cent fall in Huishan Dairy in less than an hour in March after a lender dumped collateral.
Worst of the bunch was China Jicheng Holdings, an umbrella maker, which was down 94.3 per cent and at one point fell as much as 96.4 per cent. GreaterChina Professional Services was next worst, down 93.4 per cent.
Other companies, such as civil engineering company Luen Wong Group Holdings, wine retailer Major Holdings, housing and construction services company WLS Holdings and plastic products manufacturer Amco United were all down, at one point, by more 90 per cent or more before recovering from that level.
Suffering the same fate were China e-Wallet Payment Group, investor Capital VC, China Properties Investment and China Investment & Finance Group.
The above companies were all singled out in a May blog post by David Webb, a Hong Kong-based independent investor, as among 50 Hong Kong stocks not to own. His post, titled “Enigma” charted a web of cross-holdings between the 50.
Asked about Tuesday’s share price moves, Mr Webb said there appeared to be “some kind of network effect going on” but was unsure what the precise cause might be. He suggested some investors may have received margin calls, or that some brokers in the network could have increased their capital adequacy ratios and were thus less willing to make margin loans on the stock.
Brokers pointed to the looming half year-end point at the end of this week as a natural spur for bankers to revisit loans.
Mr Webb said the sudden falls underlined his calls for the Hong Kong Exchange – the front-line regulator – and the Securities and Futures Commission, the overall watchdog to look at why the companies were investing in each other in the first place and how well they disclose those loans.
“We need to focus on the bigger issues about the gaps in rules and the weakness of the regulatory structure on the HKEX that allowed this to build up over the years,” Mr Webb said.