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Even by the standards of Hong Kong, where the ups and downs of the stock market rival events at the horse track as a spectator sport, three recent flameouts have been spectacular.

A Chinese marble miner named ArtGo plummeted by 98 per cent in one day. A Chinese automaker-turned-education-company called China First Capital dropped 78 per cent. Another education firm, Virscend, was restrained by comparison, falling 33 per cent in one day.

The tumbles over the past two weeks have little to do with the pro-democracy demonstrations that have subsumed Hong Kong for five months and sometimes caused gyrations in the local market. Instead, they point to more persistent problems in the market, which has long been Asia’s financial capital. Regulators let some dubious practices slide. Rules stifle naysayers who might rein in gullible or overly exuberant investors.

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As a result, bubbles inflate regularly in Hong Kong, sometimes with alarming speed. Then they pop, often leaving small investors with nothing but air.

Despite the political problems, Hong Kong has thrived at the crossroads between China and the rest of the world. Hong Kong’s stock exchange is the world’s sixth most valuable, according to the World Federation of Exchanges, an industry group. British lender HSBC, Chinese internet giant Tencent and a slew of Chinese banks and oil companies have raised hundreds of billions of dollars there. Last Tuesday, Alibaba, the Chinese e-commerce titan, raised more than US$11-billion selling shares there.

But critics such as David Webb, a long-time Hong Kong shareholder activist, say the local rules keep the market less than healthy.

For example, no disclosure is required when a big investor pledges shares in a company as collateral for a loan. If the loan must suddenly be repaid, the investor may have to sell a lot of shares in a hurry, driving down the price.

Hong Kong takes a dim view of short sellers – investors who bet that stocks will go down. While companies usually hate short sellers, they serve an essential role in heady markets by calling out stocks that may be trading at much higher prices than they should.

Short sellers also create alternatives to simply selling shares and walking away. Somebody who shorts a $40 stock and expects it to fall to $20, for example, is still essentially investing in the stock, albeit at a lower price. Without short selling, an investor who thinks the stock is worth less has no choice but to sell it, which is another way of saying the shares should be worth nothing.

But Hong Kong authorities consider short sellers too disruptive. They allow investors to bet against only a limited number of companies. They also punish those who aggressively question a company’s numbers. In recent years, Hong Kong officials have reprimanded and fined Moody’s, the ratings firm, and a short seller named Andrew Left, accusing them of inaccuracy in their criticisms. Both have disputed the accusations.

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A spokesman for the Hong Kong Stock Exchange’s owner, Hong Kong Exchanges and Clearing, declined to comment. A spokesman for the Securities and Futures Commission, the territory’s top financial regulator, said it “will continue to monitor the market and will not hesitate to use its statutory power to take action against parties involved in market misconduct where appropriate.”

Other factors keep the market frothy. Hong Kong has increasingly lowered barriers for investors in mainland China to cross the border and invest. Even more than in Hong Kong, mainland markets are prone to booms and busts, and some experts say those investors bring some of that volatility with them.

Hong Kong now appears to be alert to problems. The territory’s regulators recently warned listed companies not to mislead investors or include “materially false information regarding their counterparties in a transaction.” It also issued a warning to private investment firms after identifying what the regulator described as “dubious arrangement and transactions,” without offering specifics.

The three stocks that recently fell so precipitously were not flying under the radar. Mr. Webb, the shareholder activist, had placed all three on a long list of Hong Kong “stocks not to own,” after questioning their ownership and stock valuation.

“ArtGo should now be renamed ‘ArtGone,’ while Virscend should be renamed ‘Descend’ and China First Capital should be renamed ‘China Lost Capital,’” Mr. Webb said in an interview Thursday. The companies did not respond to requests for comment.

ArtGo’s stock skyrocketed this year, going from around 6 US cents a share in January to almost US$2. The company mines marble for tabletops and bathrooms, yet investors appeared to be treating it as more valuable than some of the highest-flying technology stocks in terms of its share price relative to its earnings.

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The surge in value opened up ArtGo’s shares to even more investors. It passed a threshold that would allow MSCI, a company that manages stock indexes, to include it in its China Index. Because that index is widely followed by investors, many ordinary people began to add ArtGo shares to their portfolios.

Then, on Nov. 20, MSCI reversed its decision, citing the need for further analysis of ArtGo’s business. Its shares fell 98 per cent in response.

The MSCI China Index was introduced in 2018, after much lobbying from the Chinese government to include previously restricted stocks trading in Shenzhen and Shanghai markets. MSCI did not respond to requests for comment.

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