Following is a question by the Hon Erik Yim and a reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui, in the Legislative Council today (June 24):

Question:

     Some members of the financial industry have pointed out that at present, more than half of the stocks in Hong Kong's stock market are "penny stocks" (i.e. those with a share price below $1), and among these, 200-odd stocks are priced below $0.1 (commonly known as "sub-penny stocks"), which is a proportion far higher than that in other securities markets. In this connection, will the Government inform this Council:

(1) whether it knows if the Hong Kong Exchanges and Clearing Limited (HKEX) has reviewed the causes of the proportion of penny stocks in Hong Kong being higher than that in other securities markets and formulated corresponding measures, in particular conducting reforms to address the excessively high proportion of penny stocks on GEM (formerly known as Growth Enterprise Market);

(2) as it is learnt that quite a number of penny stocks frequently engage in capital operations, with share prices often surging and plunging dramatically, and even becoming "zombie stocks" due to a lack of trading for years, causing losses to retail investors, whether the Government knows if HKEX has formulated stricter penalties or delisting mechanisms in this regard to promote the healthy development of the stock market; and

(3) as it has been reported that a large number of companies are currently queuing to list in Hong Kong, whether the Government knows if HKEX will review and optimise the rules relating to reverse takeovers, and, on the premise of effectively regulating shell activities, encourage Mainland and overseas enterprises to list and raise funds through non-speculative backdoor listing by merging, acquiring and restructuring penny stock companies and injecting quality assets, thereby reducing the number of penny stocks in the market?

Reply:

President,

     The Government has been driving the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX) to enhance market efficiency and depth through optimising the listing regime and regulatory mechanism while ensuring that investors' interests are fully safeguarded, so as to foster the long-term healthy development of the market.

     In consultation with the SFC and HKEX, the reply to the three parts of the question is as follows:

(1) As an open and international market, the distribution of share prices and market capitalisation, liquidity and sectoral composition of stocks in Hong Kong are primarily driven by different factors such as market supply and demand, company fundamentals and investors' risk appetite, etc. Share prices may be affected by the number of shares issued, historical capital operations and corporate scale. Liquidity of stocks may be influenced by external factors such as macroeconomic conditions, industry outlook and overall investment sentiment.

     To further assist small and medium enterprises with growth potential in raising capital, HKEX implemented the GEM listing reform in 2024 after consulting the market. Measures included introducing a new listing route for high-growth enterprises heavily engaged in research and development activities and introducing a new "streamlined transfer mechanism", thereby enhancing the quality of listed companies at source and boosting market sentiment. Driven by various enhancement measures, liquidity across companies of different market capitalisation levels has become more broadly distributed. Market liquidity overall increased by 65 per cent between 2021 and May 2026. Among them, liquidity of companies ranked 21st to 100th and those beyond 100th in market capitalisation rose by 92 per cent and 61 per cent respectively, raising their share of total market turnover from about 61 per cent to about 68 per cent. This distribution is comparable to other major Asia-Pacific exchanges including Japan, Korea and Taiwan.

     The SFC and HKEX will continue to assess the overall market structure and explore further enhancements to listing and trading mechanisms. By providing a more efficient market environment, we aim to enable enterprises to participate in the market more effectively, broaden the investor base and drive overall market liquidity performance, thereby better serving the needs of both enterprises and investors.

(2) The Government and regulators do not tolerate any acts of suspected market manipulation or infringement of minority shareholders' rights. We note that penny stocks and illiquid shares are more susceptible to manipulation in light of the rapid dissemination of information on online platforms and social media. In this regard, the SFC has adopted a multi-pronged strategy to combat market manipulation activities comprehensively, including "pump-and-dump" schemes.

     On surveillance, the SFC and HKEX conduct continuous daily market monitoring and real-time data analysis to detect unusual price and turnover movements to identify suspicious manipulation activities at an early stage. The SFC issues "high shareholding concentration" announcements to alert investors to related risks in cases of excessive shareholding concentration or other anomalies. The Listing Rules of HKEX also contain requirements to prevent issuers from diluting shareholders' interests through fundraising activities lacking sufficient commercial rationale, and include measures to safeguard shareholders' rights in preventing shell activities.

     On enforcement, the SFC takes appropriate criminal, civil and regulatory actions depending on the nature of individual cases. In recent years, market manipulation cases have resulted in custodial sentences, reflecting the courts' strong deterrent stance against such misconduct. The SFC will continue to maintain close collaboration with the Police and other enforcement agencies, strengthening intelligence exchange and joint efforts to combat market manipulation activities.

     HKEX has also in place a delisting mechanism to deal with issuers subject to prolonged trading suspension. HKEX provides resumption guidance within three months of suspension in general, encouraging issuers to take prompt remedial action to resume trading and address the underlying issues that are associated with trading suspension of their shares, so as to maintain the healthy development of the market. If an issuer fails to rectify the fundamental problems within the remedial period, HKEX will delist its securities under the prevailing delisting mechanism.

(3) HKEX's existing regulatory framework on reverse takeovers (RTOs) aims to strengthen regulation of shell activities, enhancing the quality and sustainable development of Hong Kong's market. The core objectives include combating abusive shell activities, addressing industry concerns about listed companies without substantive operations or businesses that may give rise to speculative trading and market manipulation risks; and preventing unqualified businesses from entering the market by circumventing the initial public offering (IPO) vetting process through backdoor listings. These arrangements are intended to maintain the overall quality of listed companies and market fairness and order, rather than restricting legitimate business expansion or diversification by issuers.

     In fact, the enhanced RTO rules provide a clear and transparent compliance pathway for bona fide acquisitions with genuine commercial rationale that facilitates corporate transformation. HKEX applies the bright line tests and principle-based tests for changes in issuer control to determine whether a transaction constitutes an RTO. If classified as an RTO, the transaction will be treated as a new listing application and must meet the same requirements as an IPO, including financial eligibility tests, sponsor due diligence, thereby ensuring that the acquisition target is suitable for listing and providing appropriate protection for investors.

     The Government will continue to promote the regulator and HKEX to further enhance the listing regime, offering high-quality enterprises from both the Mainland and overseas diversified and convenient listing and fundraising options, including traditional IPOs and special purpose acquisition companies (SPACs), thereby consolidating Hong Kong's competitiveness as a global fundraising centre.

     Thank you, President.

Ends/Wednesday, June 24, 2026
Issued at HKT 15:00

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