The heat of summer features a simmering tussle between investors and mainland concept stocks in North America. The credibility of mainland companies listed overseas has been strained by short-sellers, who have chilled the once frenzied Chinese market, by leveling charges that inaccurate information is being spread. Amid skepticism fueled by reports of huge losses by prominent fund managers, robust denials by companies tagged as losers, questions inevitably emerged, what is the situation in Hong Kong, where mainland companies account for half of its market capitalization?

"Hong Kong has very tough regulations. Some of the cases you saw in the US market wouldn't happen here, because they wouldn't meet our listing standards," said K.C. Chan.

Mainland companies went public in the US through "reverse mergers", in which a private company buys a listed shell company and retains the US listing. This roundabout practice saves firms from some of the scrutiny applied to an ordinary IPO.

These stocks, from Longtop Financial Technologies Ltd to Sino-Forest Corp, are suffering from share price slumps, as short-sellers insisted the companies supplied investors with false information. Sino-Forest plunged 75 percent in Canadian trading two days after Carson Block of Muddy Waters LLC said the company overstated its timber holdings.

"No market has a perfect record. Otherwise there is no risk. And risk is part of the picture. The question in the market is, have we tried a lot in terms of providing good regulation? Have we tried to put in place the safeguards?" said Chan.

To list in Hong Kong, the fund-raising venue that topped the world in the past two years, a company is required to show three years of profit, then survive reviews by the listing division of the local stock exchange, an independent listing committee, and Securities and Futures Commission (SFC) under a dual filing system.

Chan recalled that when he assumed his role in 2007, many people came to him saying that it is too difficult for companies to obtain listings in Hong Kong, and that the bourse should follow other market practices.

"I said: 'No, we are not going to follow other markets. I think quality is important.' We don't try to lower our quality in order to win business," said Chan.

"However, it is naive to think that your quality is so high that no one will fail," he said, "In the past, we had cases of some enterprises running into troubles, their accounting statements are not accurate. We have our own problems. But the point is, we recognize it, and we don't try to win businesses by undercutting regulation."

An IPO trouble that is still pending settlement involves Hontex International Holdings, whose stock was suspended March 2010. The High Court froze HK$997.4 million of the Fujian fabric maker raised through its IPO as SFC investigated allegations that the company overstated earnings in its listing prospectus.

In March, the city's watchdog chided investment banks and other sponsors for failing to perform adequate due diligence in their works on IPOs.

The regulator's departing head, Martin Wheatley, said on June 8 that the commission would issue a consultation paper in the third quarter to collect views on tougher penalties for IPO sponsors. The effort to reform laws means listing sponsors in dubious IPOs may face jail terms.

(HK Edition 07/15/2011 page4)