27th September 2023 – (Hong Kong) The Hong Kong Stock Exchange’s long-awaited proposals to revitalise the moribund Growth Enterprise Market (GEM) are a welcome, if belated, step towards reinvigorating this key platform for emerging companies’ fundraising and growth. The plans address flaws that caused the GEM’s decline and should rejuvenate its ability to nurture startups and innovation. However, bolder reforms are still required to fully unleash Hong Kong’s potential as a dynamic financial hub.
The GEM, formerly the Growth Enterprise Board, was launched in 1999 as Hong Kong’s second board for earlier-stage, high-growth potential companies unable to meet main board listing criteria. It drew interest during the 2000s internet boom. But regulatory tightening after the 2008 crisis, plus allowing GEM firms to shift easily to the main board, erased GEM’s allure.
Its market value plunged 99% from peak levels as investors and issuers shunned it. No new listings occurred in the past three years, rendering the market effectively defunct. This failure stains Hong Kong’s reputation as a comprehensive financial centre. Reviving the GEM is vital for supporting startup funding and growth.
The Hong Kong Exchange’s new consultation proposals are a step in the right direction. A streamlined transfer mechanism for qualified GEM firms to shift to the main board reduces the current cumbersome process. Relaxing listing requirements should attract more new economy and biotech firms. Removing mandatory quarterly reporting also lowers compliance burdens.
These tweaks thoughtfully address flaws that caused the GEM’s decline. The reforms’ intention of enhancing appeal while protecting shareholder interests is commendable. With sound implementation, they should spur listings and liquidity, revitalizing the GEM as a gateway for emerging firms to access capital markets.
This is particularly timely as Hong Kong vies with Singapore to become the biotech fundraising hub of Asia. A rejuvenated GEM providing early-stage biotech and healthcare startups smoother listing access would be a competitive advantage. Hong Kong’s geographic and cultural proximity to China also lets it serve Chinese tech unicorns seeking international investment.
A revived GEM will be crucial for nurturing the next generation of Hong Kong enterprises and returning the city’s startup ecosystem to vigour. Acting before the GEM faded completely into irrelevance shows pragmatism, unlike the typical regulatory inertia here. The proposals signal authorities recognize supporting innovation and growth matters more than eliminating all listing risks.
However, Hong Kong must go further to reclaim its financial leadership. These GEM enhancements are just one piece of modernising the city’s capital markets. Issues like the stamp duty and off-exchange trading rules must also be tackled for true competitiveness. And making piecemeal tweaks may just shift problems elsewhere, like inflating main board risks.
Bolder thinking is required to align listing rules and trading frameworks with new economic realities and priorities. This demands not minor technical fixes but a fundamental mindset change – adopting a growth and innovation mentality rather than reflexive conservatism; and streamlining bureaucracy rather than siloed incrementalism.
Singapore offers a model, pioneering novel public market constructs like SPACs as a fundraising and strategic tool. Its whole-of-government approach to supporting business contrasts with Hong Kong’s outdated segmented, reactive practices. Rival Asia-Pacific exchanges are also introducing creative accelerators and tech boards.
To thrive in the 21st century, Hong Kong cannot just play catch-up but must dare to lead in financial innovation. The GEM revamp is one step – but authorities must pick up the pace on reforms, take a more holistic strategic view, and be willing to pioneer bold new directions or risk fading into irrelevance.
Financial services remain crucial to Hong Kong’s economy and competitiveness. As the GEM’s failures demonstrated, atrophy in one market segment damages the whole ecosystem. But done right, reforms create virtuous cycles of growth and cement Hong Kong’s standing.
The GEM proposals reflect authorities are finally waking up to past missteps. But white papers and public consultations are just the start. They must be just the first phase of a sustained, multifaceted campaign of modernization and ambition for Hong Kong’s financial markets. The future of the city’s prosperity hinges on grasping the urgency of deep, wide-ranging transformation.
GEM Failures Demonstrate Risks of Complacency
The withering of Hong Kong’s GEM over the past decade holds important lessons on avoiding complacency and the high costs of inaction for financial hubs. Policy missteps, reluctance to experiment, and slowness to rectify errors risk rapid decline.
Launched in 1999, the GEM initially gained traction, attracting emerging technology firms during the dot-com boom. But tighter delisting and transfer rules imposed after the 2008 financial crisis erased its attraction. Allowing easy upward migration to the main board removed incentives to list on GEM.
By not adjusting to economic shifts, regulators caused the GEM’s stagnation. Stringent measures to prevent misconduct ended up stifling activity altogether. Its market value plunged 99%, highlighting the steep price of poor calibration and inertia.
Worsening matters, authorities took over three years to tackle the decline despite its severe economic costs. The GEM’s failure left a gaping hole in Hong Kong’s startup funding ecosystem and signalled reduced financial competitiveness.
This saga shows the dangers of over-regulation, inflexibility, and reactive thinking. Complacency and clinging to past models risk rapid obsolescence in fast-changing global markets. And reluctance to correct course amplifies the damage.
Maintaining competitiveness requires proactive, future-focused thinking, along with a willingness to monitor policies’ impacts and change direction if errors become clear. Regulators must balance integrity with supporting growth amid shifting conditions.
Hong Kong’s slow GEM response reveals a continued tendency for bureaucratic siloes and resistance to reversing course even when clearly necessary. Given Singapore’s rapid execution, this spells vulnerability unless mindsets transform.
Authorities must internalise the lessons of the GEM debacle. Beyond the immediate fixes, it underscores the urgency of adopting flexibility and promoting innovation as principles across regulation. Paired with greater cross-agency coordination, this is essential for cementing Hong Kong’s financial leadership.
Streamlined Transfer Rules Reduce Listing Burdens
Among the proposed GEM listing rule changes, reforms allowing faster transfers to the main board are particularly positive. The current cumbersome transfer mechanism imposing additional compliance burdens was a key factor behind quality companies abandoning GEM.
The new streamlined transfer process for firms meeting eligibility criteria like minimum size and trading liquidity is a pragmatic solution. Rather than mandating hiring sponsors to conduct extensive due diligence and produce voluminous prospectus-like documents, requirements are simplified for suitable GEM issuers.
This avoids unnecessarily duplicating compliance work already completed for the GEM listing. It incentivizes strong performers to shift to the main board through lower transfer costs and shorter timeframes. Smoother upward migration expands quality companies’ fundraising avenues and investor reach.
Streamlining transfers also gives firms added assurance of a future path upward through GEM. This makes starting on GEM more appealing rather than worrying over potentially being trapped at the lower tier. Knowing a transparent, efficient GEM-to-main-board mechanism exists will boost issuers’ confidence.
Overall, the updated transfer process strikes the right balance between appropriate oversight and reducing red tape. This lifts cost burdens on quality firms pursuing fundraising at scale while upholding disclosure standards. Getting these structural details right is key to making GEM work for both issuers and investors.
Relaxed Listing Standards Must Avoid Past Abuses
Proposals to relax GEM listing eligibility standards have merit for attracting high-growth companies but also bear risks seen during the 2000s boom and bust. Safeguards against past abuses are essential.
Easier listing requirements, like an alternative eligibility test for research-focused startups, should draw more new economy ventures. This helps reposition GEM as an innovation incubator. But standards cannot slip so far as to allow unvetted, speculative companies again.
Looser standards in the early 2000s allowed some firms lacking strong fundamentals or prospects to list. This damaged GEM’s reputation when many stumbled later, requiring an excessive regulatory pendulum swing.
Finding the right balance remains key. Standards must accommodate promising startups based on growth potential, not just financial track records. But issuers should still meet fundraising suitability and disclosure thresholds to protect investors.
Introducing wider tiers like Singapore’s Catalist might better integrate standards appropriate for both earlier-stage ventures and more developed SMEs. Size-based requirements could also add nuance. Such structural enhancements may prevent another regulatory whiplash later.
either excessively tightening or loosening requirements risks seesawing between instability and inertia. More graduated tiers with tailored standards paired with firmer issuer segregation safeguard GEM’s development.
Quarterly Reporting Removal Cuts Red Tape
Proposals to remove mandatory quarterly reporting obligations for GEM issuers thoughtfully balance disclosure needs and business priorities. Enhanced semi-annual reporting should provide sufficient updates for informed trading.
Preparing full quarterly reports consumes significant executive attention and compliance overheads for smaller, earlier-stage firms. The limited incremental value for shareholders hardly justifies the burden imposed.
Other Rule Changes Align with Main Board
Additionally aligning other GEM listing rules with the main board’s requirements helps create a consistent regulatory framework. Removing the need for a separate GEM compliance officer and a shortened compliance advisor engagement period streamlines compliance structures.
Such convergence reduces complexity for issuers considering migrating between boards. It also focuses oversight on principles material to all listed firms rather than periphery requirements varying by market tier.
Regulatory parsimony enabling straightforward adherence across listing segments supports business flexibility and efficiency. Centralizing core standards also aids regulatory clarity and consistent enforcement.
As reforms progress, authorities should assess further areas where unified requirements could replace redundant variations between the main and GEM boards. This consolidation approach balances appropriate oversight with commercial pragmatism.
Holistic Mindset Shift Needed Beyond Technical Changes
However, truly reviving Hong Kong’s financial leadership requires more than technical GEM rule amendments. The proposals are an encouraging start that shows authorities’ willingness to correct past mistakes. But the urgency now is accelerating the pace of reforms and elevating their ambition.
Rather than incremental tweaks, a fundamental mindset shift is needed – favouring innovation and growth over stability, streamlining bureaucracy rather than compartmentalized complexity, and pioneering new directions rather than following global trends.
This demands adopting a holistic perspective that integrates reforms across policy, legal, tax, infrastructure, talent and other spheres into a coherent strategic vision. It requires diligently reviewing the cumulative impacts of rules and procedures with an eye toward technology enablement and efficiency.
For instance, concepts like regulatory sandboxes and enhanced cross-border data flows should be prioritized to support financial innovation. As advanced economies implement blockchain applications, Hong Kong risks falling behind in enabling new technologies.
Singapore’s whole-of-government approach to coordinating agencies in executing its financial hub strategy contrasts with Hong Kong’s fragmented, reactive practices. Rival Asia-Pacific exchanges are also introducing creative accelerators and tech boards.
The GEM revamp signals Hong Kong is finally waking up to past missteps, but it is just the first phase of a marathon. To thrive in the 21st century, the city must dare to lead in financial innovation, not just play catch-up.
The future of Hong Kong’s preeminence depends on authorities internalizing this urgency. The GEM provides a blueprint of thoughtful reforms adjusted to market shifts. But replicating this fleet-footed mindset across regulation is critical as technology reshapes global finance.
