Transcript www.hkex.com.hk

THE EVOLVING ROLE OF HONG KONG AS A
SECURITIES MARKET FOR THE MAINLAND
Paul M Y Chow, Chief Executive
Hong Kong Exchanges and Clearing Limited
at University of Hong Kong luncheon on 12 March 2007
The evolving role of Hong Kong as a securities market for the Mainland
AGENDA
Page
1.
Development of Hong Kong’s Mainland role
2.
Current status
12
3.
Challenges
14
4.
Outlook
21
3
2
The evolving role of Hong Kong as a securities market for the Mainland
1. DEVELOPMENT OF HONG KONG’S MAINLAND ROLE
Since the 1980s, the Hong Kong securities market has played a key role as a bridge between
China and the world
1980s
1960-80s

Mostly British
hongs, utility
companies &
property
companies


Many HK listed
companies
opened
manufacturing
operations in
Pearl River
Delta
HK- or foreignincorporated
China
enterprises
listed in HK as
Red Chips
1993

H-shares
launched

Some Hshares and
red chips
dually listed
on HK and
overseas
markets
2000

Non H-share
Mainland
private
enterprises
listed

Very large
Mainland
enterprises
listed
2006
2005

Promote
listing of
foreigncontrolled
companies
with
Mainland
operations

Listings of
Mainland
banks and
insurance
companies

A & H shares
simultaneously
listed in the
Mainland and
Hong Kong
Since 1993, US$190 billion of equity capital has been raised by
Mainland enterprises listed in Hong Kong (being 55% of total)
3
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
Equity IPO funds raised by Mainland enterprises in Hong Kong
(1993 – 2006)
HK$ bn
350
100%
91%
87%
300
304
87%
77%
75%
90%
80%
79%
77%
250
91%
70%
66%
60%
58%
200
50%
44%
150
42%
33%
31%
100
151
40%
100
30%
77
71
50
40
9
11
1993
1994
4
1996
1997
3
7
1998
1999
0%
2000
Total IPOs by Mainland enterprises
Source: HKEx statistics
10%
20
10
0
1995
20%
51
2001
2002
2003
2004
2005
2006
% of all IPOs
4
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
Number of listed Mainland enterprises in Hong Kong (1993-2006)
400
367
335
350
No. of Listed Mainland Enterprises
304
300
249
250
214
200
168
142
150
101
112
124
100
50
55
58
1994
1995
69
38
0
1993
Source: HKEx statistics
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
5
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
The 10 largest IPOs in Hong Kong since 1993 have all been by Mainland
enterprises
Ranking
Company
1.
Industrial and Commercial Bank of China Ltd. –H shares
2.
Capital
raised
(HK$bn)
Date of listing
125.0
27/10/2006
Bank of China Ltd. – H Shares
86.7
01/06/2006
3.
China Construction Bank Corporation – H Shares
71.6
27/10/2005
4.
China Unicom Ltd.
43.6
22/06/2000
5.
China Mobile Ltd.
32.7
23/10/1997
6.
China Life Insurance Co. Ltd. – H Shares
26.7
18/12/2003
7.
China Petroleum & Chemical Corporation – H Shares
26.7
19/10/2000
8.
China Shenhua Energy Co. Ltd. – H Shares
25.5
15/06/2005
9.
PetroChina Co. Ltd. – H Shares
22.3
07/04/2000
10.
China Merchants Bank Co. Ltd. – H Shares
20.7
22/09/2006
Source: HKEx statistics
6
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
The growing Mainland dimension is illustrated by changes in our top
15 companies by capitalisation
1973
Hongkong Bank
HK Land
Jardine Matheson
Hutchison Intern’l
E.A. Navigation
New World Dev.
Wharf
China Light
Wheelock Marden
Taikoo Swire
HK Telephone
HK Electric
Hang Seng Bank
Whampoa Dock
HK & Shanghai Hotels
1983
Hongkong Bank
Hang Seng Bank
China Light
Hutchison Whampoa
HK Electric
HK Land
Wharf & Godown
Swire Pacific
Jardine Matheson
General Oriental
HK Telephone
Swire Properties
Cheung Kong
SHK Properties
New World Dev.
1993
HSBC
HK Telecom
SHK Properties
Hang Seng Bank
Hutchison Whampoa
China Light
Cheung Kong
Swire Pacific
Henderson Land
Wharf
HK Land
HK Electric
New World Dev.
Jardine Matheson
CITIC
2003
HSBC
China Mobile
Hutchison Wham.
Hang Seng Bank
Cheung Kong
Standard Chartered
SHK Properties
CNOOC
BOC Hong Kong
China Light
China Unicom
HK Electric
HK & China Gas
Swire Pacific
MTR
2006
HSBC
China Mobile
China Construction Bank
ICBC
Hutchison Whampoa
Bank of China
CNOOC
Standard Chartered
PetroChina
BOC Hong Kong
SHK Properties
Cheung Kong
Bank of Communications
Hang Seng Bank
China Life
 Denotes companies with Mainland China interests
Source: HKEx
7
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
Period-end market capitalisation of Mainland enterprises (Main Board
& GEM) (1993 – 2006)
HK$ bn
8,000
(57)
(40)
7,000
(60)
(71)
(101)
(112)
(124)
(142)
(168)
(249)
(304)
30%
4,000
(367)
55%
45%
39%
5,000
27%
(335)
50%
6,714
Market capitalisation of China-related stocks (H shares,
red chips and non-H-share private enterprises)
% of market total
6,000
27%
35%
30%
27%
25%
21%
16%
3,000
2,000
(214)
14%
3,192
9%
5%
5%
1,680
5%
1,309
1,005
1,000
144
105
128
295
15%
2,020
522
1,049
5%
982
373
0
-5%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Mainland enterprises account for half of Hong Kong’s market capitalisation.
Source: HKEx statistics
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The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
Total annual turnover of Mainland enterprises and their contribution
to the overall Hong Kong market turnover (1993-2006)*
4500
70%
3879
4000
60%
60%
3500
Turnover (HK$ bn)
50%
49%
3000
46%
46%
42%
2500
40%
38%
33%
2000
29%
28%
1665
30%
1657
26%
1344
1500
20%
1052
866
1000
11%
9%
500
122
787
12%
92
444
8%
63
499
461
10%
161
0
0%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
*Excluding Derivative Warrants
Source: HKEx statistics
Turnover of M ainland enterprises
Contribution to total market turnover
9
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
Since the 1994, HKEx has broadened the range of Mainland related product
offerings
1994
• Stock options,
futures &
warrants for
individual
Mainland
enterprises
developed
2003
2004
2005
2007
• H-share
Index futures
launched
• H-share Index
options
launched
• FTSE / Xinhua
China 25
futures and
options
launched
• Hang Seng China HFinancials Index
futures to be launched
• iShares FTSE/
Xinhua A50
China Tracker
launched
• RMB futures to be
launched
• Derivative warrants
with iShares FTSE/
Xinhua A50 China
Tracker as underlying
launched in March
2007
• Position limits of Hshare Index futures
and options to be
increased
Source: HKEx
10
The evolving role of Hong Kong as a securities market for the Mainland
1. Development of Hong Kong’s Mainland role
Quarterly volume and quarter-end open interest of H-shares Index
futures and options* (2004 – 2006) (Number of contracts)
1,800
450
419
Aggregate volume
1,600
400
Aggregate open interest
341
350
352
1,200
300
277
1,000
250
222
205
193
800
200
141
600
92
400
150
Open interest ('000 contracts)
Turnover volume ('000 contracts)
1,400
100
109
62
339
520
502
Q3 04
50
Q2 04
461
488
528
649
572
1,198
1,562
1,256
1,623
Q4 06
Q3 06
Q2 06
Q1 06
Q4 05
Q3 05
Q2 05
Q1 05
0
Q4 04
0
38
Q1 04
200
H-share futures and options are growing in popularity.
* H-shares Index futures were introduced on 8 December 2003 and options were introduced on 14 June 2004.
Source: HKEx statistics
11
The evolving role of Hong Kong as a securities market for the
Mainland
2. CURRENT STATUS OF MAINLAND ROLE
 Hong Kong provides a full-service equity market

equity fund-raising

trading

futures and options

derivative warrants
 Underpinned by international standards and best practices

Hong Kong Listing Rules adopt international standards, e.g. Corporate
Governance Code comparable with London’s

H shares regime requires information disclosure, IAS, reporting, auditing,
investor protection

MORC with Mainland authorities helps regulatory coordination
12
The evolving role of Hong Kong as a securities market for the Mainland
2. Current status of Mainland role
Mainland enterprises have contributed substantially to the Hong
Kong securities market ( figures as at 31 December 2006)
Mainland
enterprises % of total
Unit
Total
No. of listed companies
Number
1,173
367
31%
No. of newly listed companies
Number
62
39
63%
Main Board
Number
56
33
59%
GEM
Number
6
6
100%
Market capitalisation
HK$bn
13,337.7
6,714.5
50%
Total equity funds raised
HK$bn
524.5
384.9
73%
Funds raised by IPOs
HK$bn
333.9
304.2
91%
Funds raised in secondary market
HK$bn
190.7
80.6
42%
HK$bn
26.2
15.7
60%
Average daily turnover – equity
Source: HKEx statistics
13
The evolving role of Hong Kong as a securities market for the Mainland
3. CHALLENGES TO HONG KONG’S MAINLAND ROLE
 Mainland market revival
 Overseas exchange competition
 Mainland-Hong Kong market alignment
 Hong Kong internal issues
14
The evolving role of Hong Kong as a securities market for the Mainland
3. Challenges to Hong Kong’s Mainland role
Challenge 1: Mainland market revival
January 2007 – onwards
January 2006
• Mainland markets in decline
for 4 years
• Share structure reform still in
progress
• IPO freeze for a year
• Securities firms insolvent or
being restructured
•
•
•
•
•
•
•
•
•
Mainland stock indices at record highs
Daily turnover exceeds RMB100 billion
Share structure reform largely completed
IPOs resume
– China Life raises RMB28 billion
– Ping On Insurance raises RMB38 billion
Increasing domestic listings
RMB appreciates - HK$ less attractive
Financial futures exchange to commence
operations
Possible development of CDR
Expansion of QFII and QDII
A dramatic change in just one year.
15
The evolving role of Hong Kong as a securities market for the Mainland
3. Challenges to Hong Kong’s Mainland role
Equity funds raised in Mainland China (Shanghai and Shenzhen)
compared with Hong Kong (2002 – 2006)
(US$bn)
70
60
50
40
67
30
20
39
36
31
28
10
14
9
10
10
1
0
2002
2003
Mainland China
2005
2004
2006
Hong Kong
Source: China Securities Regulatory Commission, Shanghai Stock Exchange and Shenzhen Stock Exchange, HKMA statistics, HKEx statistics
16
The evolving role of Hong Kong as a securities market for the Mainland
3. Challenges to Hong Kong’s Mainland role
Challenge 2: Overseas exchange competition




Mainland enterprises are already listed on several overseas exchanges
 New York
 Nasdaq
 London
 Singapore
 Australia
 Tokyo
 Toronto
This year, the number may increase (Germany, Korea …)
However, Hong Kong has the lion’s share of listings, funds raised and turnover
Because Hong Kong is perceived as the home market:
 Language and culture
 Analyst following
 Retail investor support
 Professional know-how
 Time zone and geographical proximity
17
The evolving role of Hong Kong as a securities market for the Mainland
3. Challenges to Hong Kong’s Mainland role
Market share of turnover of Mainland enterprises in Hong Kong and US (2006)
US
(18.4%, HK$335 bn)
Hong Kong
(81.6%,
HK$1,486 bn)
Hong Kong has more than 80% of the trading in the two markets.
Source: HKEx statistics, Reuters
18
The evolving role of Hong Kong as a securities market for the Mainland
3. Challenges to Hong Kong’s Mainland role
Challenge 3: Mainland-Hong Kong market alignment
 Simultaneous A:H share listings highlight differences between Mainland and Hong
Kong primary markets, e.g.
 Pre-prospectus information
 Bookbuilding method
 IPO subscription method
 Suspension and resumption policy
 Secondary markets also differ greatly (investor accounts within CSD, settlement
period, trading mechanism, trading hours, price / issuer news dissemination, etc.)
 The current fundamentally different market models preclude full alignment
 Capital controls and restrictions on RMB convertibility limit possible alignment
 Investor within and outside Mainland China not allowed to trade in each other’s
securities market (with the exception of QDII and QFII)
 Different statutory regulators and regulatory regimes
Improved information flow may be the best solution in the medium term.
19
The evolving role of Hong Kong as a securities market for the Mainland
3. Challenges to Hong Kong’s Mainland role
Challenge 4: Hong Kong internal issues
 Hong Kong faces internal barriers to market expansion
 Stamp duty
 Short selling constraints (under review by SFC)
 Derivatives position limits (under review by SFC)
 Stock borrowing and lending constraints
 New product approval processes
 Some of Hong Kong’s “soft” infrastructure needs upgrading
 Public offering regime (under review by SFC)
 Companies Ordinance (under review by Companies Registry)
 Statutory regulation of listed companies (under review: “statutory backing”)
 IPO mechanism
 Shareholders protection, shareholding transparency and electronic voting
 Corporate governance and enforcement need constant vigilance
 Difficulty of cross-border regulatory enforcement
 The need for wider use of electronic means for collection and dissemination of
information
20
The evolving role of Hong Kong as a securities market for the Mainland
4. OUTLOOK
 Mainland growth is expected to continue, hence:

Need for capital

Need for risk management

Need to absorb corporate governance / management technique to compete
globally
 Mainland economy is expected to become more and more open

QFII and QDII

Gradual liberalisation of RMB
 International investors will continue to be interested in the Mainland

Capital available

Growing business potential

But preference for international-standard regulation and corporate governance
 Hong Kong will continue to be an attractive channel into the Mainland

Freely-convertible currency

Free market economic system

Open to foreign investors and market participants

International network
21
The evolving role of Hong Kong as a securities market for the Mainland
HKEx Mission 2004-06
“To operate a world-class marketplace for Hong Kong and Mainland
China securities and derivatives products.”
HKEx Mission 2007-09
“To be a leading international marketplace for securities and
derivative products focused on Hong Kong, Mainland China and the
rest of Asia.”
The evolving role of Hong Kong as a securities market for the Mainland
4. Outlook
The new strategy places emphasis on Hong Kong’s positioning as
Mainland’s international financial centre
Themes
Meaning
Initiatives
Mainland
Positioning
• China’s international
exchange
• Complements Mainland
exchanges
• Partners Mainland
• Collaboration with Mainland authorities and
exchanges
• RMB-related products
• A&H shares listing and information exchange
• Mainland intermediaries and issuers
Business
Expansion
• Seeking new
businesses and
customers
• Seeking more business
from existing
customers
•
•
•
•
•
Overseas issuers (Mainland nexus)
Commodity and emissions-related products
Asian focus
New cash and derivatives products
Address barriers to the securities market
• Service mentality
• Cost-effectiveness
• Focus on customers
•
•
•
•
Service culture
Internal efficiency/automation
Accountability and organisation structure
Compensation linked to service / staff
performance
Service
Enterprise
23
The evolving role of Hong Kong as a securities market for the Mainland
4. Outlook
Ongoing and planned initiatives in 2007:
 Formation of the A+H Working Groups with Shanghai Stock Exchange and Shenzhen
Stock Exchange

Facilitation of A- and H-share dual listing

Harmonise primary and secondary market procedures and information disclosure
 Attraction of Mainland intermediaries to be Exchange Participants in Hong Kong
 Working more closely with potential issuers who are in the Mainland or with Mainland
nexus for listing in Hong Kong
 Introduction of RMB futures products in mid-2007
 Relaxation of position limits for H-share Index options and futures products
 Introduction of real time H-share index movement and prices of H-share index futures
on HKEx website
24
The evolving role of Hong Kong as a securities market for the Mainland
4. Outlook
HKEx is committed to building a quality market which will continue to
strengthen its role as the securities market for the Mainland
Success of a securities market
Market
Quality
Goal
Investor
Confidence
Market
Liquidity
Order
Flow
HKEx focus
Geographical
focus
Business
focus
Operate an open, secure,
fair, orderly, efficient &
transparent marketplace
Focus on HK,
Mainland China and
the rest of Asia
Focus on
business
expansion and
provision of
quality service
25
Thank You!
26