Last week's Hanergy and Goldin Financial sell-offs test Hong Kong market at a critical point

Written by Aida Hassar || May 25 2015

The shares of three companies recently experienced an unprecedented slump, which nobody can precisely explain.

The coincidence is disturbing. Shares of three companies held by two majority shareholders have just experienced an unprecedented tumble in Hong Kong, and nobody has a clear explanation for it. This Thursday, Goldin Financial and Goldin Properties, both controlled by billionaire Pan Sutong, violently lost more than 50% of their value, after sharing a meteoric rise of over 300% since the beginning of the year. On Wednesday, it was the turn of the energy savings solutions provider Hanergy, collapsing by only 24 minutes. Controlled by another billionaire, Li Hejun, Hanergy had experienced a rise of 162% since the beginning of the year at the HKEx. Its value had multiplied by 6 in one year.

At this stage, the greatest mystery lies on the reasons for these phenomena, but the similarity between these companies is striking: meteoric rise, then sudden collapse. Because they are positioned on struggling industries (solar energy and real estate in China are struggling), it is possible that suspicion falls on the reliability of the financial statements they had shown so far.

Hong Kong investors are no stranger to those impressive stock market variations, especially as mainland China’s enthusiasm for equities has spread to the former British colony. The high proportion of retail investors also make shares more prone to fluctuations, but even so, such violent movements are unusual for companies this big. By market capitalization, the sell-offs at Hanergy and Goldin Financial are the equivalent of Yahoo or American Airlines suddenly halving in value.

And this episode comes at a crucial moment. Hong Kong’s stock exchange operator has opened a link allowing foreign investors to buy shares in Shanghai, and a planned connection with Shenzhen is likely to go live soon. Yet to lure wary foreign investors, Hong Kong must show it can enforce values of openness and integrity.