The latest Global Financial Center Index results were announced last week, and Hong Kong once again placed third in the global ranking, just one point ahead of Singapore. We know that the competition for higher ranking is very keen, as many cities are making a huge effort to become important global financial centers.
In the past we have lost third place to various cities, including Shanghai, Tokyo, and Singapore. However, the one complaint that is commonly heard these days is Hong Kong’s lackluster stock market performance. There is a glaring and growing gap between the performance of the United States’ and Hong Kong’s stocks. Some commentators think that Hong Kong’s “overly strict regulations” are hurting us. In general, of course, all regulations that are “overly strict” are no good. It is important for the regulators to be strict whenever being strict is warranted, and to stand aside whenever standing aside is warranted. While the GFCI ranking is a good reference point for reflection, so we can find out where we are weak and make improvements, there is not much point in loosening up regulations for the sake of getting ahead of others. The most important thing is that the Hong Kong financial center can serve the needs of the economy effectively while protecting investors from possible abuses and misinformation.
While the GFCI (Global Financial Center Index) ranking is a good reference point for reflection, so we can find out where we are weak and make improvements, there is not much point in loosening up regulations for the sake of getting ahead of others. The most important thing is that the Hong Kong financial center can serve the needs of the economy effectively while protecting investors from possible abuses and misinformation
This month, Hong Kong Exchanges and Clearing released a consultation document on special purpose acquisition companies, which have become very “hot” in the last couple of years. SPACs have been around since 1993, but only recently have they become popular. Among many reasons, one is that, because of quantitative easing, there is just too much cheap money around looking for opportunities in which to invest. This has contributed to the surge in the prices of cryptocurrencies, non-fungible tokens, and many stock markets and real estate.
Some people are unhappy about the HKEX going slow on SPACs and proposing such restrictions as limiting the subscription for and trading of a SPAC’s securities to professional investors only and requiring that the funds to be raised in IPOs be at least $1 billion. However, such safeguards are necessary, as is the requirement that a successor company (the acquired company) must meet all new listing requirements. First, the odds are pretty high that SPACs may not be able to identify and may not succeed in acquiring a company deemed attractive. One study noted that of 474 SPACs that have been launched since 2009, only 188 completed mergers. The failure rate is some 60 percent. Small investors may be tempted by the furor about SPACs and thoughtlessly invest their hard-earned money in SPACs that turn out to be flops. Professional investors, having a much bigger portfolio, can better afford such failures.
Moreover, another study from Bloomberg Law Analysis found that even when acquisitions are successful, many acquired companies did not do well, and this is happening in a booming market. The report says: “Year-to-date, most post-merger U.S. SPACs are not performing well. … The average depreciation in value of the 24 negatively performing post-merger entities is 26 percent, with the two worst performers reporting a loss in value of over 60 percent.”
This is not to say that SPACs are necessarily counterproductive. The fact that the HKEX has released the consultation document suggests that it is open to the idea that SPACs could be good for the economy, particularly with proper safeguards. According to Reuters, citing Dealogic data, companies globally have raised $131 billion so far in 2021. That translates to a lot of business for the bourses. But many SPACs’ poor financial performances and a regulatory crackdown have cooled the frenzy. Hong Kong certainly should not loosen regulations just to boost business and GFCI ranking.
Hong Kong’s stock market underperformed not because of tighter regulations by the regulatory authorities in Hong Kong, but largely because of tighter regulations by regulatory authorities on the Chinese mainland on mainland companies and the soured China-US relations. There were rumors that Beijing has put pressure on Hong Kong’s developers to help address Hong Kong’s housing problems. The Real Estate Developers Association of Hong Kong has publicly said that none of its members has ever had pressure from Beijing, and that they always support the Hong Kong Special Administrative Region government to alleviate the housing shortage. In any case, Hong Kong’s high housing prices reflect a shortage of developable land — an issue that is beyond the capability of the developers to address. It is an issue that all stakeholders in Hong Kong need to work together to resolve. Moreover, as I explained in last week’s article, triggering a major decline in housing prices will not be in the interest of anyone. Hong Kong needs stability, consistency, and attention to the public interest. Regulators need to do their jobs, our developers need to do their jobs, and so does everybody. We are glad that we can always fall back on the Basic Law: As long as we respect and comply with the Basic Law, the Basic Law will protect our interests, and we will not have to worry about surprises.
The author is director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.
The views do not necessarily reflect those of China Daily.