WASHINGTON (AP) — Hong Kong's stock market on Friday prohibited investors from making speculative bets about the stock of a Chinese chemical company backed by U.S. banking giant Morgan Stanley for at least 90 days. A day earlier, The Associated Press reported significant discrepancies between financial records and what the company told investors as part of its $654 million stock offering.
A spokesman for the exchange, Scott Sapp, declined to comment on the reason for prohibiting short-sellers from targeting Tianhe Chemicals Group Ltd. Sapp directed the AP to the stock market's rules designating which companies can be sold "short," in which investors bet that a company's price will fall.
By the AP's calculations, depending on how those rules were interpreted, sluggish trading in July and August could have led Tianhe to qualify automatically for the protections from shorting. The exchange announced its intentions Nov. 7, and the prohibition took effect on Friday.
Similar blanket restrictions on short-selling a particular company do not exist in U.S. markets — and tend to ease pressure on the stocks of companies facing significant complaints, said Kathleen Hanley, a University of Maryland professor and former economist for the Securities and Exchange Commission.
With fewer people selling a company's stock, Hanley said, negative views are less likely to be reflected in its price.
"Restricting short-selling means fundamental information doesn't get into the market," Hanley said.
AP reported Thursday on serious discrepancies in what Tianhe told investors when Morgan Stanley & Co. LLC, Bank of America Merrill Lynch and UBS AG took it public in June. Barely two months after its initial offering, a shadowy investment research group tied to people betting against Tianhe's stock alleged that the company had overstated its profits.
Hong Kong regulators froze the $7.9 billion company's stock for more than a month in September. Since the allegations were made, Tianhe has lost 39 percent of its value. The exchange — which cleared Tianhe to resume trading —declined to comment on the AP's findings last week, citing its practice of not discussing individual companies. The AP's review corroborated many details described by the mysterious group, Anonymous Analytics, and raised other new questions about the company's business and background. The AP's report said difficulty verifying even simple questions — such as whether the Chinese government owned any assets in one of the company's predecessors — highlighted issues about the diligence of stock exchanges and investment banks that serve as the Chinese financial market's gatekeepers.
Tianhe disputed the AP's findings, asserting that discrepancies were the product of misinterpretation, out-of-date records and common Chinese business practices. Morgan Stanley reaffirmed confidence in Tianhe's management.
Investors remained skittish, however, sending Tianhe's stock tumbling more than 40% in October, a fall from which it has only partially recovered. Morgan Stanley's stock analysts — who have predicted the controversy will blow over and Tianhe's share price will nearly double from current levels — speculated last month that some major investors "just no longer want to be involved."
In response to the fall, Tianhe's management bought up tens of millions of dollars of its own shares and announced that the company would repurchase as much as $150 million of its shares over six months.
The company has exhausted two-thirds of that amount over the last five weeks, spending more than $20 million on its own shares on Friday alone. The company's purchases accounted for more than one-third of the trading in its stock for the day. Tianhe's shares ended the day down 2 percent.
The Hong Kong exchange's prohibition on betting against the company will make its buy-back money go further, Hanley said.
"This could prevent (short-sellers) from overwhelming the share buyback," she said.