Investing in China Through Hong Kong

INVESTING IN CHINA THROUGH STOCKS LISTED IN HONG KONG

A invest in China is to buy Chinese companies listed in Hong Kong. Currently, some of the high quality Chinese state-owned-enterprises and private companies are traded there. In fact, Hong Kong Stock Exchange and Hong Kong Enterprise Growth Market actively encourage Chinese companies to list there, as many high quality private Chinese companies are unable to become a public entity in Chinese domestic stock exchanges due to listing restrictions.

Hong Kong Stock Exchange

Reports of securities trading in Hong Kong date back to the mid-19th century. Rapid growth of the Hong Kong economy led to the establishment of three other exchanges - the Far East Exchange in 1969; the Kam Ngan Stock Exchange in 1971; and the Kowloon Stock Exchange in 1972.

Pressure to strengthen market regulation and to unify the four exchanges led to the incorporation of the Stock Exchange of Hong Kong Limited in 1980. The four exchanges ceased business on 27 March 1986 and the new exchange commenced trading through a computer-assisted system on 2 April 1986. Prior to the completion of the exchange merger in March 2000, the unified stock exchange had 570 participant organizations.

Hong Kong Enterprise Growth Market (GEM)

Hong Kong Enterprise Growth Market is designed specially for growth enterprises, particularly those emerging ones, i.e. enterprises that have good business ideas and growth potential, however, may not always be able to take advantage of these opportunities. A great number of them do not fulfill the profitability/track record requirements of the existing market of the Stock Exchange of Hong Kong ( i.e. main board of the Exchange ) and are therefore unable to obtain a listing. The Growth Enterprise Market (GEM) is designed to bridge this gap.

As GEM offers investors an alternative of investing in "high growth, high risk" businesses, the future performance of growth companies particularly those without a profit track record is susceptible to great uncertainty. Because of the higher risks involved, GEM is designed for professional and informed investors. It works on the basis of caveat emptor or buyers beware.

Caveat Emptor (Buyer Beware) – Investing in China Through Hong Kong Stock Exchanges

Although stocks listed in Hong Kong offer greater transparency than stocks listed in China, investors still need to aware that thorough investigations are needed when making decisions.

The idea of shareholder value is not deeply rooted in the minds of managers of Chinese companies, nor is there strong incentive for them to create shareholder values. It is said that some of the biggest companies in China often create complex structures as well as subsidiaries in order to maximize the profits that the company/managers would receive. For example, listed Company A has another entity that is not listed, let’s say Company B. They are owned by the same person or the same group of people. When a good project comes, the listed Company A obtains it. However, when a better project, more profitable project comes into place, the non-listed, non-public entity Company B records it into its accounting book. Remember, the corporate tax rate in Hong Kong is one of the lowest in the world. Therefore, shareholders would be at disadvantage when this happens.

Please note that it would be even more difficult to discover activities by Hong Kong listed entities to detriment shareholder’s values. Occasionally, the Hong Kong Securities Regulatory Commission (HKSRC), the equivalent of the Securities Exchange Commission (SEC) of the United States would bring spotlight to illegal activities by Hong Kong listed companies. Having said that, it would be not impossible to discover quality companies that present investing value.