Enigmatic trading

The sudden and enigmatic crash last month of Hong Kong small cap shares has drawn renewed attention to the challenges of regulating mainland Chinese-based companies.

In late June, dozens of penny stocks on the Growth Enterprise Market plunged in the space of an hour, with some, like plastic umbrella maker Jicheng Holdings, tumbling 90 percent or more.

There’s been no clear explanation, though in a report issued in June local investor activist David Webb detailed their links in a complex web of cross shareholdings that he dubbed the Enigma Network. Webb said the links served to artificially inflate the small caps’ share prices.

Another common theme running through this and other Hong Kong stock market scandals involving companies listed on the main board is that many are based in mainland China.

Hong Kong’s regulators face a growing challenge in policing listed companies as Chinese companies take an increasingly outsized role in the territory’s financial markets. There are limits to what they can do when such companies’ senior executives are beyond their reach on the mainland, which is a separate jurisdiction.