Hong Kong wipes out 2,000% stock gains after regulator reins in speculation

The S&P/Hong Kong GEM Index has declined 2.2% this year, while the main exchange's Hang Seng Index has climbed 9.7%

The world’s most volatile new stocks are vanishing from Hong Kong after regulators tightened oversight of the city’s small-cap Growth Enterprise Market.

Stocks debuting on GEM in the past 12 months rose an average 23 per cent on their first day of trading, down from an eye-popping 605 per cent for the year through January 2017, according to data compiled by Bloomberg. The performance in the recent period is more in line with the main exchange’s first-day gain of 18 per cent.

A crackdown by Hong Kong Exchanges & Clearing Ltd and the Securities and Futures Commission helped rein in extreme volatility and speculation in Hong Kong’s small-caps, said Daniel So, a strategist at CMB International Securities Ltd. Three GEM stocks surged more than 20-fold on their debuts in the year through January 2017, before authorities tightened listing requirements and probed how new shares were allocated, among other efforts. Amid the push, several initial public offering applicants shelved their plans.

“The risk of investors getting burned in violent ups and downs has been contained,” said So.

GEM-listed Luen Wong Group Holdings Ltd was one of the world’s best-performing debuts in 2016, rising 1,438 per cent on its first day of trading and ending the year up 8,515 per cent from its listing price. The civil-engineering contractor now trades at 31 Hong Kong cents a share, up just 19 per cent from the IPO.

In the past 12 months, only four GEM listings had first-day gains above 100 per cent. The average return after one week in the recent period was 24 per cent compared with 466 per cent for the prior year, the data show.

The S&P/Hong Kong GEM Index has declined 2.2 per cent this year, while the main exchange’s Hang Seng Index has climbed 9.7 per cent.

GME Group Holdings Ltd, a subcontractor of tunnel excavation that soared 543 per cent on its February 22 debut last year and was halted, became the subject of a regulatory investigation. The stock plunged more than 80 per cent on its first trading day following the suspension. The SFC ordered three brokerages to freeze trading accounts amid a probe into suspected manipulation of GME shares.

HKEX unveiled planned changes to GEM last month. The exchange operator said it will extend the lock-up period for controlling shareholders to two years from one, and introduce a mandatory public offer of 10 per cent of the total offer size. It said it would also raise the minimum market capitalisation for new issues to HK$150 million ($19.2 million) from HK$100 million, and increase the minimum cash-flow requirement to HK$30 million from HK$20 million.

“We need more reform to change or replace the GEM board, which is marginalized in Hong Kong,” said So.