The lazy consensus in financial circles is that Hong Kong Exchanges and Clearing can save its junior market by simply erasing the boundary.
Every few years, when transaction volumes dry up and regulatory introspection hits peak anxiety, someone in Central floats the exact same tired rescue plan: merge the Growth Enterprise Market into the Main Board. The conventional narrative treats GEM like a broken appliance. The logic goes that if you rebrand the secondary tier, lower the listing barriers, and funnel those micro-cap aspirants straight into the primary pool, liquidity will magically materialize. Read more on a connected subject: this related article.
It is a comforting delusion. And it is completely wrong.
I have spent two decades watching market operators try to engineer liquidity through cosmetic surgery. I have seen underwriters burn millions structuring vehicles for companies that had no business being public in the first place, all to satisfy exchange quotas. Merging GEM with the Main Board does not fix the underlying pathology of Hong Kong equities. It merely infects the healthy tissue with the disease. More reporting by Reuters Business delves into comparable perspectives on this issue.
The Structural Fallacy of the Micro-Cap Tier
Let us clear up the core misconception immediately. People treat GEM as a staging ground for future tech giants, a regional Nasdaq where garage-born startups scale into regional titans.
That definition died a quiet death years ago.
In reality, GEM evolved into a backdoor listing mill and a parking lot for shell companies. The mechanics of the market incentivized volume over velocity, high sponsor fees over post-IPO stewardship, and regulatory box-ticking over actual price discovery. When an exchange creates a second-class board with lower thresholds, it does not attract visionary entrepreneurs. It attracts promoters looking for an easy exit to retail investors who do not read the fine print.
The proponents of the merger argue that institutional investors are ignoring GEM because of brand stigma. They claim that absorbing these small-cap firms into the Main Board will grant them instant credibility and broader index inclusion.
This argument ignores how institutional capital actually operates. Big money does not avoid GEM because of a three-letter acronym. They avoid it because of fundamental market structure failures: abysmal daily turnover, rampant insider concentration, and a complete lack of analyst coverage. Changing the signboard on the door does not change a company with fifty million dollars of market capitalization into an investable asset for a global pension fund.
What Happens When You Lower the Bar
Imagine a scenario where the exchange pushes the merger through tomorrow, flattening the regulatory tiers and welcoming lower-threshold issuers straight onto the premier board.
What happens to Main Board valuations? They compress.
When you dilute a premier index with speculative, thinly traded micro-caps, you force institutional risk models to re-evaluate the entire ecosystem. Portfolio managers do not suddenly start buying micro-caps just because they share a ticker directory with Tencent or HSBC. Instead, they apply a blanket discount to the entire Hong Kong large-cap and mid-cap space to compensate for the governance risk creeping in through the back door.
We saw a preview of this when the exchange introduced tighter vetting and fast-tracked delisting rules years ago. The market panicked because cleaning house is painful. Merging a failing junior board into the parent board is not cleaning house. It is sweeping the dirt under the living room rug and calling the room cleaner.
Let us look at the numbers that the optimists conveniently ignore. The velocity of trading on GEM has historically been a fraction of the Main Board. A significant portion of GEM stocks trade with zero daily volume for weeks at a stretch. If you absorb hundreds of dormant, illiquid entities into the Main Board, you dilute the average liquidity metrics of the entire exchange. You give quantitative funds and algorithmic traders even more reason to route their order flow to Singapore, Tokyo, or New York.
The Regulatory Theater of Listing Reform
Financial regulators love structural reforms because they look like action without requiring actual accountability. Changing listing rules generates press releases, consultation papers, and endless panels at industry conferences. It creates the illusion of a proactive market operator.
True market health requires abandoning the obsession with raw IPO counts. Hong Kong has spent decades treating the number of new listings as a badge of geopolitical honor. Who cares if you rank first in global IPO proceeds for a given year if half of those newly minted public companies trade down by seventy percent within six months and never raise secondary capital again?
An exchange is not a charity for aspiring entrepreneurs or a playground for shell-flippers. It is a capital allocation machine. If a company cannot clear the rigorous disclosure, governance, and scale requirements of a true primary board, it does not belong in the public markets. Private equity, venture capital, and private debt exist precisely to fund early-stage risk. Forcing public retail markets to subsidize pre-revenue or sub-scale enterprises under the guise of supporting entrepreneurship is economic malpractice.
The Unspoken Cost of Regulatory Convergence
The counter-argument usually centers on cost efficiency. Underwriters and sponsors complain that maintaining two separate boards with distinct compliance frameworks creates administrative bloat.
Let us be brutally honest about whose costs are actually being reduced here. It is not the retail investor holding a bag of depreciated micro-cap shares. It is the sponsors and legal advisers who want a frictionless pipeline to push marginal deals across the finish line with minimal pushback.
When you streamline listing requirements to boost volume, you lower the friction for bad actors. The administrative burden of GEM compliance was not a random bureaucratic hurdle. It was a friction tax designed to filter out firms that lacked the operational maturity to handle public shareholder scrutiny. Remove that filter, and you invite a wave of speculative volatility that permanently damages retail confidence.
Retail investors in Hong Kong already bear an outsized burden. They are the liquidity providers of last resort for structural blow-ups. Expanding the perimeter of the Main Board to encompass the dregs of the junior tier is a direct transfer of risk from institutional underwriters and promoters to retail balance sheets.
The Alternative Nobody Wants to Implement
If Hong Kong actually wants to revitalize its equity market, it needs to stop tinkering with board structures and address the structural gravity pulling capital away.
First, stop treating market capitalization as a vanity metric. Prioritize post-IPO liquidity over sheer listing volume. If a company fails to maintain a minimum daily trading volume or a healthy free float after two years, enforce an automated, frictionless ejection from the board. No appeals, no grace periods, no regulatory forbearance.
Second, revamp the enforcement mechanism for sponsor liability. Underwriters who bring speculative garbage to the market should face existential financial penalties if those companies implode or engage in suspicious corporate actions within thirty-six months of listing. When the people underwriting the risk have skin in the game, listing standards enforce themselves.
Merging GEM into the Main Board is a retreat disguised as progress. It is an admission that the exchange has given up on fixing the pipeline and has decided instead to lower the standards of the destination.
Stop trying to manufacture liquidity by rearranging deck chairs on a sinking platform. Let the weak listings die, protect the integrity of the primary board, and force companies to earn their place in the index.
