Hong Kong’s mysterious sell-offs

"Now that is some proper value destruction," says Deutsche Bank's Michael Lermer. Last Wednesday, shares in Hanergy Thin Film Power, the world's biggest solar power equipment maker by market value, slumped by 47% for no apparent reason. A day later, the two main business units of a horse breeding, wine and finance conglomerate, Goldin Financial and Goldin Properties, both fell by around 40%. Shareholders in the three companies lost a joint $36bn.

This is the equivalent of both Yahoo and American Airlines halving in value, says Peter Thal Larsen on breakingviews.com. These mysterious blow-ups "are testing Hong Kong at a crucial point". It has just opened a link allowing foreign investor to buy shares in Shanghai, and another to mainland China, through Shenzhen, is set to go live soon. But "to lure wary foreign investors", it will need to show it "can enforce value of openness and integrity". These wild swings suggest "standards are slipping".

Not necessarily, says Lex in the Financial Times. There have always been companies on the Hong Kong market that have provided "an outlet for people's gambling instincts", notes David Webb, a corporate governance activist in Hong Kong. These were precisely those sorts of companies operating in exotic sectors and with most of the shares closely held by their owners.

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What does seem clear, however, says Danny Fortson in The Sunday Times, is that the new connection to mainland China created an influx of Chinese retail investors that "supercharged the shares of previously anonymous companies". The link opened in mid-November. By early last week, both Hanergy and Goldin had surged.

But investors fretting about Asia should remember that Western markets "have implosions too", notes Lermer. "Witness US artisan marketplace Etsy's 20% crash after its results, or Google's $20bn slide in 2012 after a disappointing earnings statement". This is also a warning for passive investors, notes Randall Foryth in Barron's.

Hanergy had become the biggest holding in a US-listed solar energy-focused exchange-traded fund, which lost 9% last week. The bigger a stock gets, the greater its weight in an index. "Such is the danger of simple-minded, mechanical index investing."

One reflection of the subdued global recovery since the financial crisis has been the lacklustre performance of Asian exports. Exports from north-east Asia are particularly closely watched, notes The Economist, as these reflect Japan's high-tech expertise, Korean and Taiwanese electronics, and China's assembly skills. This "juggernaut", accounting for 25% of world exports, has slowed to a crawl. In April, for example, Korean exports were down 8% year-on-year; China's, 6.4%.

But this doesn't suggest the global economy is about to plunge off a cliff. The link between north-east Asian exports and world growth has started to weaken, says The Economist, with the former trailing US GDP in the past three years. This is due to a structural shift in regional trade.

In the first decade of this century, as China joined the World Trade Organisation, companies moved their Asian supply chains there. China would tend to import parts and put them together for re-export. But now that China is making more sophisticated goods, it is less reliant on imported parts.

As the share of intermediate parts in China's imports falls by 11% since 2007, says Royal Bank of Scotland less intra-Asian trade is needed to produce the same final goods. Along with the commodities decline and a structural slowdown in both China and the developed world, this is another reason not to expect Asian export growth to return to the levels seen before the crisis.