Hong Kong's penny shares aren't even worth that much, after a rout in their ranks prompted by possible margin calls.
The record lows plumbed by Hong Kong's secondary exchange, the Growth Enterprise Market or GEM, show how careful investors have to be when investing in Asia. Listing and disclosure requirements leave a lot to be desired in my part of the world, where market meddling often appears to verge on fraud.
The GEM market sank to its lowest level in history on Wednesday, falling 2% in intraday trade and posting a 0.9% loss at the close. That's after shedding 9.6% the day before that wiped $3 billion off its value.
The GEM is in theory oriented toward tech stocks. But it is, in reality, a dimly lit back corner for little-known corporate shells and has-beens that flit in and out of the shadows. The high concentration of shareholdings and tiny floats among GEM stocks leaves them open to manipulation and "pump and dump" schemes.
The worst losses in the latest selloff surround a cluster of companies that share many of the same shareholders. Almost all, if not all of them are linked to or held by an investment company called Black Marble.
Shareholder activist David Webb outlined the links in a May 15 report "The Enigma Network" 50 stocks not to own." Many are bubble stocks, he believes.
A network of companies has acted in concert to buy hefty stakes in other companies among those 50, he says. By splitting their interests, the people behind the companies buying other companies avoid rising above the 30% ownership threshold at which it's necessary to make a general offer for all the shares.
"If the corporate shareholders are not acting in concert then it is an extraordinary coincidence that they have picked many of the same stocks in which to invest," Webb said. Hong Kong's stock regulator, the Securities and Futures Commission, "should be taking a close look at this network."
By avoiding regulatory scrutiny, the people behind the network hold enough of the stocks in the target companies, combined, to control voting. That means they call the shots when the companies go to "independent" shareholders asking "to do something that might not make sense to others," Webb said.
Webb is unsure why some but not all of the stocks he mentioned have crashed now. But it's possible the stock regulator or the brokerages lending against the shares have started to look a little closer.
"I can only speculate, but it's possible margin calls have been triggering the selloff," he told Reuters. "It's possible the brokers involved have been told to stop lending against those shares."
Webb added that "maybe the people operating the network have decided to dump and run."
Corporate governance can be poor at some of the companies listed on Hong Kong's main board, let alone the GEM. Suspect spinoffs and preferential share sales have left minority shareholders looking at missing millions, and the bank accounts of founding tycoons substantially bolstered.
Umbrella maker China Jicheng Holdings HK:1027 was the biggest loser on Tuesday, dropping 93%. It flat-lined at that level on Wednesday.
The financial-services company Lerado Financial Group HK:1225 said on Wednesday that it had sold HK$24.96 million ($3.2 million) of its shares in the umbrella company. Lerado's shares were suspended by Hong Kong's Securities and Futures Commission, the stock regulator, on June 6 after it declared "materially false, incomplete or misleading information" in a company circular from October 2015.
That document outlined Lerado's plans to raise money and expand margin lending at its business unit Black Marble. Black Marble planned to underwrite a share placement for asset-appraisal and asset-advisory firm GreaterChina Professional Services HK:8193, the notice said, and make an open offer for the brokerage China Investment & Finance Group HK:1226.
GreaterChina Professional Services fell 34% on Wednesday after a 94% plunge the day before. China Investment & Finance plunged 46% on Wednesday to exacerbate a 52% loss on Tuesday.
Lerado said on June 7 that its business continues as usual and that it doesn't expect its share suspension to have a material adverse effect on its day-to-day operations.
The S&P/HKEX GEM Index has lost more than 90% since 2000. It has continued to fall precipitously this year, despite gains in Hong Kong's benchmark Hang Seng Index, one of the region's best performers.
Even though the GEM is struggling to get by, Hong Kong is considering introducing a third "New Board" exchange for "new economy" companies. That would allow unprofitable companies to list and make it easier for mainland Chinese listings to get a second listing in Hong Kong.
The New Board would allow a dual-share ownership structure, which is outlawed under current rules - for the good, in my book. The desire to take in public money without giving up voting control was something that drove e-commerce giant Alibaba (BABA) to list in New York. Hong Kong was its first port of call.
China National Culture Group HK:0745 said it sold 1.63 billion shares in China Jicheng, too, to raise HK$34.85 million ($4.5 million). It fell 15% on Wednesday after a 33% drop on Tuesday.
Another China Jicheng shareholder, QPL International Holdings HK:0243, sold HK$2.0 million ($260,000) in the umbrella maker's stock. It dropped 22% on Wednesday, after falling as much as 85% on Tuesday, before closing down 56%.
Webb says that serious professional investors would regard pure stock-market investments by listed companies as "highly inappropriate," unless the parent company is a bona fide investment company. Such holdings take management beyond their area of expertise, instead of focusing on their core competencies and attempting to return surplus capital to their own investors - so they can invest it.
The CEO of Hong Kong Exchanges and Clearing (HKXCY) , the for-profit company that operates Hong Kong's markets, said the GEM's image is hurting Hong Kong's reputation as a financial center.
The exchange operator earlier this month floated a "concept paper" suggesting broad changes for GEM listings, including making it harder for GEM companies to transfer to the main Hong Kong stock exchange, which they can currently do after posting three years of profitability.
Another proposal would raise the minimum market cap for a GEM initial public offering by HK$10 million ($1.3 million) to HK$30 million ($3.85 million). The changes would also extend the lockup period for controlling shareholders to two years.
The Hang Seng led declines among major indexes on Wednesday, down 0.6% at the close. Tencent Holdings (TCEHY) , the largest stock on the exchange, was one of the biggest losers, off 1.8% at the closing bell.
Google's record $2.7 billion antitrust fine from the European Union was the main cause for the tech despair. But Hong Kong's drab and dirty little GEM has plenty of its own reasons to continue to fall.