Hong Kong’s coasts are clear. Of Muddy Waters: Part II, that is. The city-state’s Finance Secretary, John Tsang, assured investors that its “stringent set of international standards” would never allow for another Sino-Forest saga to unfold.
“Many of these companies who got into trouble would not have been able to list in Hong Kong,” Mr. Tsang told The Globe and Mail’s editorial board on Tuesday.
His comments came after a Moody’s red flag report warned of accounting and governance risks at 61 small Chinese companies - four of which are listed on the Hong Kong Stock Exchange - causing the already unnerved market to draw a speedy retreat. The credit rating firm was responding to investor concerns on its own lack of transparency on Monday. The report sparked a selloff in the companies’ shares and bonds on Tuesday.
Moody’s pitted the companies against 20 red flags, meant to “high-light issues meriting scrutiny to identify possible governance or accounting risks for non-financial corporate issuers in emerging markets,” according to a Reuters report. The red flags are grouped into five categories: weak corporate governance, risky business models, fast-growth strategies, poor earnings quality and audit concerns.
Mr. Tsang remains undeterred. “Moody’s is always coming out with some of these warnings,” he said.
“I think that companies are willing to come out and demonstrate that they are sound, and the regulatory agencies are looking into seeing whether there is any problem because there are suspicions that they may be short-selling the stocks before they come out with analysis.”
He maintains that the Moody’s red flag report is more a reactionary response than a real cause for concern. “In Hong Kong we have a pretty stringent listing arrangement for companies that come in through the backdoor in a reverse takeover. They go through the same procedure as they would in an ordinary IPO.”
Mr. Tsang added that Hong Kong’s first-quarter growth was at 7.2 per cent, with unemployment at 3.5 per cent.
“We are positioning ourselves as the third international financial sector,” he added. “You cannot create an international financial sector by decree.”
Mr. Tsang was in Toronto on an official visit to enhance the bilateral relationship between Hong Kong and Canada (“People need to know what Roots is.”). More than 300,000 Canadians live in Hong Kong, making up the largest expat community, far surpassing Britain’s 80,000.