We asked for the report. They refused. Now we're really wondering what's in it.

Breaking: HK Government withholds Task Force report, citing threat to financial markets stability
29 January 2024

Back on 29-Aug-2023, the HK Government announced the establishment of the Task Force on Enhancing Stock Market Liquidity (TFESML), to "comprehensively review factors affecting stock market liquidity and make improvement proposals to the Chief Executive [of HK]". TFESML was chaired by Carlson Tong Ka Shing and you can see the background of its members in Webb-site Who's Who here. None could really be said to be an investor, although one (Ding Chen) runs CSOP Asset Management, which issues index-tracking Exchange-Traded Funds (ETFs) and one (Sally Wong Chi Ming) runs the HK Investment Funds Association, which represents issuers of mutual funds.

Anyway, we awaited their report with keen interest. Would they, for example, recognise that the dollar amount of liquidity is a function of company valuations, which in turn reflect the discount applied by investors for the lack of disclosure, lax reporting deadlines, unbounded capital-hoarding, lack of class action rights, fake INEDs elected by controlling shareholders, and so forth? Would they perhaps recognise that racing to the bottom by allowing listings of second-class shares with weaker voting rights was the wrong direction? Would they recognise that introducing a higher-trust framework is the patriotic thing to do, because the resulting higher equity valuations would lower the cost of capital for the nation's issuers and make the PRC economy more competitive?

The next mention of TFESML was in paragraph 71 of the HK Chief Executive's Policy Address on 25-Oct-2023, when he announced that TFESML had submitted its report and that he had accepted its recommendations. What were those recommendations, then? Well, he only listed some of them, including reversing the 2021 increase in stamp duty, cutting it back to 0.2% (split 50:50 between buyer and seller) from 0.26% on each transaction. Stamp duty is not payable on ETFs, warrants or derivatives, by the way.

The CE would also get Hong Kong Exchanges and Clearing Ltd (HKEX, 0388), the Government-controlled operator of the monopoly stock exchange, to review its minimum trading spreads. This is leftover business from when David Webb, Founder of Webb-site.com, was a shareholder-elected independent director of HKEX from 2003-2008. Shareholders have 6 seats on the 13-member board. He did succeed in getting spreads cut to efficient levels for higher-priced stocks above HK$5, but for those below that point, the Board backed down in the face of opposition from small brokers who hold their own seat in the Legislative Council. Phase "2B" of the proposals spread-reductions was not to be, and was cancelled.

So what else was in the report? In the past, it was standard practice to publish the reports of such committees. For example, we had the Report of the Panel of Inquiry into the Penny-Stocks Incident in 2002, followed in 2003 by the Report of the Expert Group to Review the Operation of the Securities and Futures Market Regulator Structure, which the Government briefly adopted before back-tracking. That would have stripped the for-profit HKEX of its regulatory function and unified the administration of the Listing Rules with the Takeovers Code under the SFC, as most modern markets do. For-profit regulation is an oxymoron.

Hong Kong, unfortunately, is back-tracking on disclosure too, and the TFESML report has not been published. So we filed a request for the report under the non-statutory Code On Access To Information (HK still lacks a freedom of information law and a Government archives law). On 23-Jan-2024, the Secretary for Financial Services and the Treasury (via a minion) came back to us, rejecting the request. Their reasons for the rejection, if genuine, should ring alarm bells. Here they are in full:

  1. Publishing specific details of market analysis in the report could be interpreted by the market as the Government’s position on market trends and forecast of future performance, which may bring unwanted influence to the market and prejudice the maintenance of stability in financial markets. Paragraph 2.8 of the Code applies.
  2. Premature disclosure of the detailed directions that the market operator and financial regulators were recommended to study may trigger market speculation of specific initiatives and cause preemptive market movements, which would not be conducive to the maintenance of stability in financial markets. Paragraph 2.8 of the Code also applies.
  3. The Task Force’s deliberations on specific measures warrant protection and should not be subject to excessive public scrutiny to ensure that the frankness and candour of individual members in tendering their views to the Government can be preserved. Paragraph 2.10 of the Code applies. (our bold)

Reason 3 holds no water, because such reports almost never attribute views to individual members; the committee reports as a body, or at most, it will say "some members held view A while others held view B". Reason 1 is also rather silly, because the report represents the views of TFESML, not the views of the Government. But setting that aside, Reason 1 does suggest that the report contains views on "market trends and forecast of future performance" which may "prejudice the maintenance of stability in financial markets". What dark outlook does TFESML hold? Are the HK markets doomed? Should we be told?

Similarly, in Reason 2, what "detailed directions", other than those disclosed in the Policy Address, did TFESML recommend? What "preemptive market movements" threatening the "stability in financial markets" could these recommendations (which the CE said he has "accepted") cause? Did they propose a bail-out fund? A ban on short-selling? A merger with the Shanghai and Shenzhen Exchanges? Or something sensible, like the abolition of stamp duty on equities?

Sunshine is always the best disinfectant. Unless and until the Government publishes the report, the secrecy in itself "may trigger market speculation". Let's see the report and have an open public debate about its recommendations.

© Webb-site.com, 2024

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