Yesterday morning we discussed the sudden crashes amid 17 small cap Hong Kong firms, which collectively lost over $6 billion in market cap, on what we dubbed was a marketwide margin call, as confidence in the entire sector vaporized instantly, sending the small cap Growth Enterprise Market (GEM) plunging by over 9%, with some stocks plunging over 90%. Quoted by Bloomberg, Francis Lun, the CEO of HK’s Geo Securities said ‘we’re seeing a domino effect; all the companies in the same network got cut. These shares are owned by the same group of people so they must be experiencing a liquidity crunch and they don’t have the money to support the share prices.”
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It turns out there was more to this story, at the heart of which is a report issued six weeks ago titled ‘The Enigma Network: 50 stocks not to own’ by David Webb, a former director of the Hong Kong stock exchange, whose argument is that companies which crashed were entwined in a complex web of cross-shareholdings that had pushed their valuations to unsustainable levels. As Reuters adds, “Webb’s report mapped out a complex web of cross-shareholdings between companies listed on both the main board and its sibling, the Growth Enterprise Market, which he said created a breeding ground for volatility.”
This post was published at Zero Hedge on Jun 28, 2017.
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