There is rising concern both in Hong Kong and overseas about the quality of listings coming to the Hong Kong Exchanges & Clearing in recent years.

The expert group reviewing the operation of the securities and futures market regulatory structure report there is widespread belief that in efforts to achieve critical mass and maximise the quantity of new listings, the quality of the new listings has been seriously compromised.

Last year, there were 117 new listings on the HKEx �V an increase of 33% over 2001. This was achieved despite an 18% decline in the Hang Seng Index and a 17% decline in secondary market turnover.

It was also in the context of a 36% decline in initial public offering issuance globally and a net reduction in listed companies both in New York and London.

To the extent that the increase in Hong Kong might be thought to be attributable to continuing economic growth on the Mainland, in 2002, there was also a 12% decline in new listings in Shanghai.

As at the end of February 2003, 60% of the 117 new listings were trading below their initial public offering price, some of them by more than 90%. Half were trading below 50 cents.

Group chairman Alan Cameron said: "We have been told that only a handful of these new listings in Hong Kong were of any interest to professional investors or international sponsors.

"Indeed, some major international investment institutions told us that they only bought one or two of these offerings. Of the 60 Main Board listings, only five were sponsored by global investment banks."

Only two of the 57 Growth Enterprise Market listings were sponsored by global investment banks.

Many respondents observed that Hong Kong has become a two-tier market with a small number of relatively high quality companies which are of interest to professional and international investors and a much larger number of companies which are not.

There is a danger that such new listings might cause international investors to come to view Hong Kong as a "penny stock market". This is not to say that smaller companies are necessarily of poor quality.

However, many of the new listings in Hong Kong did not attract meaningful levels of either institutional or retail investor interest and had negligible secondary market turnover.

Mr Cameron said it is difficult to establish just what the motivation for listing was; all that is clear, is that it was not the traditional purpose of raising funds from public investors to invest in an expanding business and create economic value and employment.

Other reasons include creating liquidity, such as providing an opportunity for a wider range of investors to invest in an established and successful business, without an associated capital raising, but that is happening very rarely.

Some issues appear to be contrived transactions to achieve listed status for some unclear or at least undisclosed objectives.

The GEM market is not viewed as a success. The performance of many issues has been poor with the GEM index falling by some 90% since its peak in March 2000, and by 45% in 2002 alone.

Secondary market turnover is minimal and declining. Average daily volume fell from $253 million in the first quarter of 2002 to $94 million in the fourth quarter.

About 80% of the stocks listed on the GEM market are trading at or below their IPO price. On most days during the period of our work, about half of the stocks listed did not trade at all and a number were suspended for a variety of regulatory reasons.

The Securities & Futures Commission and HKEx have publicly expressed concern about this continued deterioration of new listings on both the Main Board and GEM.

The failure of the current listing regime to arrest this trend indicates some degree of dysfunctionality.

Mr Cameron said: "There are already signs that the high standing of the market as a whole is being tainted by the performance of many of the poor quality stocks. In the long term, this could lead to lower valuations, reduced liquidity and a higher cost of capital.

"If Hong Kong is to retain its perceived advantage of being a high quality, developed market capable of attracting the Mainland's best companies and investors who want to invest in the world's fastest growing major economy, it is essential that this problem is addressed as soon as possible."