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Roman (Securities Times reporter)

As of August 8, a total of 27 Hong Kong stocks have been delisted this year, and 42 new stocks have been listed. Compared with the number of new listings, Hong Kong's "problem companies" are being "cleared out" at an accelerated pace.

In fact, the Hong Kong Stock Exchange has been continuously improving the Hong Kong stock delisting system, simplifying the delisting procedures, strengthening the supervision of delisting, strictly implementing the delisting system, and building a market-oriented and normalized exit mechanism of "in and out, survival of the fittest". In 2018, the Hong Kong Stock Exchange amended the listing regulations and launched a "fast delisting" mechanism. If a main board listed company is suspended for more than 18 consecutive months (Main Board "Listing Rules" Article 6.01A), if a GEM listed company is suspended for more than 12 consecutive months (GEM "Listing Rules" Article 9.14A), the Hong Kong Stock Exchange has the right to cancel the company's listing status, and can also publish a delisting notice at any time depending on the specific matters and circumstances of individual suspended companies. The Hong Kong Stock Exchange will also give suspended listed companies a remedial period. If they fail to resume trading within the remedial period, the Hong Kong Stock Exchange will delist them.

Statistics show that since the amendment of the delisting procedures in the Listing Rules came into effect in 2018, the number of delistings ordered by the Hong Kong Stock Exchange has increased sharply year by year. In the past five years (2019-2023), a total of 192 companies have been delisted, which is 8.7 times the total number of companies ordered to delist since 2011. From 2011 to 2018, the total number of delisted listed companies was only 22.

The delisting system is a basic system of the capital market. By setting delisting standards to screen and classify listed companies, it helps to eliminate "zombie enterprises" and "black sheep" in the market and improve the overall quality and efficiency of the market. In other words, it is the so-called "cleaning the house" while "inviting guests in."

There are two types of delisting in Hong Kong stocks: "voluntary delisting" and "forced delisting". There are generally two reasons for voluntary delisting: one is that shareholders propose privatization delisting, and the other is to withdraw the listing application. Forced delisting is caused by the listed company triggering the mandatory delisting mechanism of the Hong Kong Stock Exchange, that is, the number of days of suspension exceeds the relevant regulations.

Compared with the delisting system of US stocks, I think the Hong Kong Stock Exchange needs to be more aggressive in delisting listed companies. Both the Nasdaq and NYSE markets of US stocks use quantitative delisting indicators, focusing on market value, number of shareholders and stock price to make clear provisions for delisting conditions, and fewer provisions for financial indicators. Therefore, about half of the delisted companies in the US stock market are forced to delist, and therefore, the US stock market maintains a healthy "metabolism". Hong Kong stocks use non-quantitative delisting standards, and "forced delisting" mainly depends on the number of days of suspension, liquidation by the High Court, insolvency or loss of sustainable operating capacity, etc. The Hong Kong Securities and Futures Commission and the Hong Kong Stock Exchange have a lot of subjective judgment on whether a company should be delisted, so it is usually not sufficient at the execution level.

At the same time, the delisting mechanism of Hong Kong stocks does not have an over-the-counter market like the A-share third board market or the US stock "pink sheets" for the circulation of delisted stocks. Instead, it adopts a "one-time delisting" mechanism, which means that once a listed company delists, the value of its stock will vanish in an instant, causing huge damage to the interests of public investors and making regulatory authorities extremely cautious about delisting.

Looking at all the mandatory delisting cases of Hong Kong stocks, it usually takes more than 2 years from the company's suspension to the issuance of the delisting notice. With the remedial measures for resumption of trading and administrative review, it may take several years. On the Nasdaq in the United States, it usually takes no more than 75 days from the discovery that the company does not meet the conditions for continued listing to the decision to issue a delisting notice. Even if the entire process is strictly followed in accordance with the regulations, it will be within 360 days. There is no delay in the delisting procedure.

The consequence of this problem is that the Hong Kong stock market is a mixed bag, especially the rampant "shell stocks", "scam stocks" and "zombie stocks" that have been stuck in the market for a long time. Statistics show that on August 8, the number of stocks with zero turnover on the Hong Kong Stock Exchange reached 760, accounting for 29% of the total number of Hong Kong-listed companies, while the number of stocks with a turnover of less than HK$10,000 reached 1,056, accounting for 40%. In addition, the number of companies suspended from trading reached 99, of which 85 companies had been suspended for more than 3 months.

The author suggests that the Hong Kong Stock Exchange should further standardize and refine the delisting rules for "zombie stocks" that occupy market resources, such as long-term no transactions and long-term suspension. As an international market, the orderly operation of the Hong Kong stock market capital market must be two-way open, with both entry and exit. The capital market is composed of market access, market competition, market transactions, and market exit mechanisms. The market exit mechanism is an effective market economic operation mechanism that maintains the vitality of the Hong Kong stock market capital market through continuous dynamic adjustments.

The opinions expressed in this column are solely those of the author.