An independent governance group has warned investors to be wary in buying A shares once the Shanghai-Hong Kong share through train is up and running, saying less investor protection in the Chinese equity market could leave them exposed to problem companies.
The Asian Corporate Governance Association said it hopes mainland and Hong Kong regulators will make corporate governance and investor protection a priority ahead of the scheme’s planned October launch.
“There is still six months for the regulators on both sides to work out the details. We hope they will emphasize corporate governance and investor protection issues,” Michael Cheng, association research director for China and Hong Kong, said Tuesday. “This will include investor recourse to remedies.”
In an initiative to open up its capital market further to offshore investors, the State Council announced last Thursday that it had approved a mutual market access mechanism between the Shanghai and Hong Kong bourses, paving the way for greater cross-border investment and money flows.
Asked about market concerns on the attractiveness of the Hong Kong market to Chinese technology companies given the number seeking listing on the NASDAQ, association secretary general Jamie Allen said: “We have tech companies like Tencent [Holdings Ltd. (00700.HK)]. If Tencent can, why can’t Alibaba [Group]?
“In fact, Charles Li [chief executive of Hong Kong Exchanges and Clearing Ltd. (HKEx, 00388.HK)] should promote Hong Kong to Chinese tech companies rather than catering to the special interests of those companies.
“We also think that it is not true that capital structure can determine a company’s economic performance … Microsoft [Corp. (MSFT.US)] and Amazon[.com, Inc (AMZN.US)] are also doing well on one share, one vote.”
One share, one vote
The association said it surveyed 70 of its corporate members on the “one share, one vote” issue more than 85 percent of the 54 respondents said it is not necessary to allow non-standard shareholding structures for innovative companies.
The survey follows Alibaba’s decision earlier this year to abandon plans to list in Hong Kong in part because of HKEx’s unwillingness to allow a dual shareholding structure that would let senior management retain control of Alibaba’s board.
“One share, one vote is actually one of the areas that works well in Hong Kong and we advise the Hong Kong government not to change it at all,” Allen said, adding that some of the respondents are from the US. “Although the United States allows dual class listing, not everyone there is keen on that.”
Cheng said quality drove market competitiveness.
“Take London as an example. It introduced a standard listing group with lower corporate governance and a premium listing one in 2010, but not much improvement has been seen and they are now talking about tightening the rules to lift the protection,” he said.
“The systems in Hong Kong and the US market are very different. There are stronger legal remedies and disclosure bases on the corporate governance regime in the States.”
The association said it would also not be a good idea to introduce a dual class structure for the Growth Enterprises Market because the GEM board is a stepping stone to the main board and it is hard to change to structures when a company makes the move to the main board.
According to the survey, more than two-thirds the respondents would either not buy or apply a discount of between 5 percent and 50 percent to Alibaba shares if it listed with a dual class structure.
In all, 28 percent of the respondents think that HKEx performed badly on the Alibaba issue while 35 percent had no opinion. Allen said the concerns were mainly due to the exchange’s alleged conflict of interest and Li using his blog to promote a change.
“Actually, the set-up of the SFC’s [Securities and Futures Commission] own corporate surveillance department is a significant move to us because if the exchange is doing an excellent job on this, then the SFC doesn’t have to set up a separate one,” Allen said.
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