The S&P/Hong Kong GEM Index was down 9.64% on Tuesday, pulled down by group of small cap stocks, with seventeen firms cleavering US$6.1 billion off of market capitalization.
Traders indicated the move was an isolated incident, with the shares involved all owned by the same group of people, experiencing a credit crunch. The broader market was mostly flat, with the Hang Seng index losing only 0.1%. The Hang Seng Composite Small Cap Index was hit harder, with a fall of 0.4%.
“I don’t think this is dangerous to most of the market,” Brett McGonegal, CEO of CapitalLink International told Asia Unhedged. “It will affect any stock held with one holder at 75% and could have a spill over – as we know you always have to sell something else – but these are highly speculative names that most likely don’t have investors that huge mid to large cap holdings [do]. So I would think it’s a problem in that universe only.”
“It seems there was a financial firm that had a close or even familiar role with a couple players and extended credit and invested in some paper in the related groups,” McGonegal explained.
“My guess is with half year end the equity pledged against credit or loans or placement investments was exercised today and it set off a panic in those names and some others. If you look at the holders’ lists, all of the names were very opaque holdings where a single entirety owned 75%, which is max in Hong Kong with no real free float, thus the only thing in the market prices was air.”