Sessional_Paper_1925 — Page 108

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7. In June, 1924, the third body came into existence, namely: the Share and Real Estate Brokers' Society of Hongkong which was started by Mr. J. F. Wright and Mr. T. W. Hornby, former members of the Hongkong Stock Exchange. These gentlemen, who returned to the Colony in the year 1924, were not willing to comply with the conditions fixed for their re-entry into the Hongkong Stock Exchange and consequently let it be known that they were going to form a third Exchange.

8. Throughout the evidence, these three bodies are referred to as No. 1, No. 2, and No. 3 or the First, Second and Third Exchanges respectively.

9. A distinctive feature in the rules of the third Exchange is that by Article 22 each member of the Society must make a deposit of $50,000 on the 1st January, 1925, and in the case of members elected after that date then, within one week after election, they must deposit the sum of $50,000 in cash with the Committee. We have it in evidence that this sum was subsequently reduced to $30,000 inade payable in three in- stalments of $10,000 each on the 1st April, 1925, 1st October, 1925, and 1st April, 1926.

10. The number of members of the third Exchange was limited to thirty, but we were informed by Mr. Fernandez in his evidence (Question No. 204; Appendix D, page 2) that because of the restrictions imposed by Rule 22 the number became less; in fact, only six members paid their first instalment of $10,000, one of whom has asked for it to be returned (Question No. 211; Appendix D), page 3).

11. All the three Exchanges have been incorporated under the Hougkong Companies Ordinances. The first Exchange was incorporated under the Companies Ordinances, 1865-1890; the second Exchange under the Companies Ordinances, 1911-1921; and the third Exchange under the Companies Ordinances, 1911-1923. Seats on the first two Exchanges have become very valuable; the last seat sold on the Hongkong Stock Exchange realised a sum of $40,000. The rise in price was very rapid during the last three years, as we have it in evidence that six years ago a seat was bought for $1,500 (Question No. 850; Appendix F, page 28). In 1924 the second Exchange increased its inembership from 15 to 24 by admitting nine new members at a cost of $15,000 a seat, which sum was deposited with the Committee. Besides these Exchanges there is a num- ber of outside brokers, and the number of brokers generally is greatly increased by the Article common to all three Exchanges which allows each member, or in the case of a partnership such partnership to employ one authorised clerk who is not a member of the Exchange. It will thus be seen that there may be over 100 persons connected with the three Exchanges, all authorized to deal in shares with members of the public.

12. During the last few years there has been a large increase in speculative opera- tious on the share market. This increase was mainly due to a great influx of Chinese money which, on account of the unsettled conditions prevailing in China, was brought into the Colony for safety. Money became cheap and this encouraged speculation both on real and anticipated prosperity. There has been a great deal of real prosperity among local companies during the last few years, as an examination of their balance sheets will show, and consequently the value of their shares was bound to rise. In many cases, however, they have risen beyond the figure which the prosperity of the company justifies. With the increase of speculation many persons gave up their ordinary business and took up the work of share broking either as members of an exchange or as outside brokers or authorized clerks.

13. The causes of the collapse of the market in June were the following:-

(a) Dealing by unsound brokers with unsound clients.

(b) Dealing by unsound brokers with sound clients.

(c) Over-financing by native banks who, we are informed, were in the habit of advancing up to 80% or 90% of the market value of the shares. Even 100% has been mentioned.

(d) The general apprehension felt by the Chinese community as to the probable effect of the threatened strike and a boycott on the prosperity of Hongkong.