Disclosing the Coming Crash

The South China Morning Post reports [subscriber only] that one-seventh of the companies listed this year on Hong Kong’s thriving stock exchange DID NOT comply with Mainland China’s social welfare rules. How did SCMP know this? The companies in question acknowledged the non-compliance in their IPO prospectuses!

I have no idea what the disclosure requirements are for Mainland companies listing on the Shanghai index, but I’d bet my E*Trade portfolio that non-compliance is at least as rampant there, too, if not more so. In either case, Hong Kong and Mainland investors are unlikely to take a sudden interest in the actual quality of the companies which they are bidding up. SCMP could report that one-seventh of the leadership of the recently listed IPOs have been convicted of murder-for-hire, and it wouldn’t drive the price down. For now, at least, up arrows are the research tool of choice for investors in Hong Kong’s and Shanghai’s stock markets.

I should note that non-compliance with social welfare rules is common throughout China. Those rules – and the related taxes – are expensive. In Shanghai, they can amount to a 36.5% tax on every salary paid. Of course, since most salaries don’t amount to much – say, a few thousand US$ per year – that burden shouldn’t be too tough on the overseas and Hong Kong companies that are required to pay them.