Institutional investors in the Hong Kong securities market

1. Institutional investors in the Hong Kong securities market Paul M Y Chow Chief Executive, HKEx Presentation to the Hong Kong Retirement Schemes Association 2 March 2005

2. Agenda • Overview of the Hong Kong securities market • Institutional Investor Profile - Overall • Local institutional investor profile • Overseas institutional investor profile • Regulatory/infrastructure developments affecting institutional investors • Business developments affecting institutional investors • China Dimension

3. Overview of the Hong Kong securities market Hong Kong stock market is 16 times its size in 1986

4. Overview of the Hong Kong securities market Hong Kong was third in equity funds raised in 2004 Source: Provisional figures (Jan-Dec 04) World Federation of Exchanges (not include exchanges for which statistics are not available). Includes capital raised by issuers cross-listed on other exchanges; i.e. double counting involved WFE monthly statistics report available up to 14 Feb 2005

5. Overview of the Hong Kong securities market Cash market (Main board & GEM) as at end of 2004 • Global ranking by market capitalisation: 9th • No. of listed companies: 1,096 • No. of newly listed companies (2004) : 70 • Market capitalisation: HK$6,696 billion • Turnover value: HK$3,974 billion • Funds raised by IPO: HK$97.2 billion • Total equities funds raised: HK$281.4 billion • Products: equity, warrants, ELI, unit trusts and debt securities

6. Overview of the Hong Kong securities market Hong Kong derivatives market has increased 24 times since 1986

7. Overview of the Hong Kong securities market Derivatives market (as at end of 2004) • Global ranking by turnover: 35th • Total turnover: 19,629,692 contracts (35% compared to 2003) • Hang Seng Index futures: 8,601,559 contracts • Products: futures and options on stocks, stock indices and interest rates

8. Institutional Investor Profile - Overall Institutional investor is the largest contributor to stock market turnover, except in 1997 and 2000 Source: Cash Market Transaction Survey 2003/2004, HKEx

9. Institutional Investor Profile - Overall Institutional investors also actively participated in the Hong Kong derivatives market Source: Derivatives Market Transaction Survey 2003/2004, HKEx

10. Institutional Investor Profile - Overall Trading value of institutional investors in the stock market continued to rise over the years Source: Cash Market Transaction Survey 2003/2004, HKEx

11. Institutional Investor Profile - Overall Trading volume of institutional investors in the derivatives market also increased over the years. Source: Derivatives Market Transaction Survey 2003/2004, HKEx

12. Institutional Investor Profile - Overall • Key players of the Hong Kong securities market • Key players of the Hong Kong derivatives market • Trading activities continued to expand over the years

13. Local Institutional Investor Profile Local institutional investors contributed 23% and 10% of trading in cash and derivatives markets

14. Local Institutional Investor Profile

15. Local Institutional Investor Profile Source: Derivatives Market Transaction Survey 2003/2004, HKEx

16. Local institutional investor profile Total: 1.7 million contracts

17. Local institutional investor profile • Major contribution to capital raised • Important contributors to cash market turnover (23%) • Smaller contribution to derivatives market turnover (10%) • Local fund managers are happy with the followings • China potential • Main Board corporate governance and disclosure • Listed company regulation • And they have concerns about GEM & Mainland companies

18. Overseas Institutional Investor Profile Overseas institutional investors contributed 33% and 22% of trading in cash and derivatives markets

19. Overseas Institutional Investor Profile

20. Overseas Institutional Investor Profile

21. Overseas institutional investor profile Total: 3.6 million contracts

22. Overseas Institutional Investor Profile Institutional investors mostly come from Europe, UK and US Source: Cash and Derivatives Market Transaction Surveys 2003/2004, HKEx

23. Overseas institutional investor profile • Major contribution to cash market turnover (33%) • Major contribution to derivatives market turnover (22%) • Major contribution to equity capital raised • Overseas institutions contribute more trading value than local institutions in both the Hong Kong cash and derivatives markets • However their investment decisions, particularly in IPO subscription, are often influenced by local institutions. This is especially true for those overseas institutions with Hong Kong branches. • Overseas institutional orders mainly came from the US, United Kingdom and the rest of Europe.

24. Regulatory/infrastructure developments affecting institutional investors • Strengthening corporate governance regime • Issuer disclosure (website archives) • Regulation of sponsors and IFAs • Listing Rules enforcement (dual filing, statutory backing) • Proposed regulatory regime for accountants (Independent Investigation Board and Financial Reporting Review Panel) • Narrowing of trading spreads • Review of position limits of derivatives products • Transition to scripless market • CCASS Fees review • AMS/3, HKATS and DCASS capacity upgrade • Introduction of corporate actions database / electronic voting • Review of risk management regime • Market network consolidation Regulation Trading / Clearing Fund managers play a crucial role in the pursuit of a quality market. In particular, your role in enhancing issuer quality via scrutiny and corporate voting.

25. Business developments affecting institutional investors • Strengthen HKEx business presence via our offices in Beijing, Guangdong and Shanghai • Attract listings of Mainland enterprises and HK/overseas companies with Mainland business operations • Support the continuous liberalisation of the Mainland investment market • H shares index futures and options • A50 China Tracker (listed on 18 Nov 2004) • Callable Bull and Bear Certificates • FTSE / Xinhua China 25 futures and options China New products China dimension remains the focal point of business development in the Hong Kong securities and derivatives market.

26. China dimension • No discussion on HKEx and its marketplaces will be complete without a review of its China dimension. • HKEx currently facilitates capital formation in Mainland China and provides local and global investors with a fair, secure, efficient and transparent access to invest in quality China enterprises. • We look forward to the opportunities in the future to service the many investors, retail and institutions, in the Mainland.

27. China dimension

28. China dimension

29. China dimension

30. China dimension The Ten largest IPOs of Hong Kong

31. China dimension • China related companies (including H shares, red chips and Non-H share Mainland private enterprises) are increasingly attracted to seek listing on HKEx’s Main Board and GEM. They now represent: • 28% of total number of listed companies (as at 31 Jan 2005) • 30% of market capitalisation (as at 31 Jan 2005) • 32.1% of total equity funds raised for 2004 • 79% of IPO funds raised for 2004 • 42% of total turnover value for 2004 • More importantly, trading activities of these China related companies stay with Hong Kong. Hong Kong has an average of 80% and 99% of market share in the trading of China stocks dually listed in US and London respectively.

32. China dimension Key market statistics of Hong Kong, Shanghai and Shenzhen Source: Websites of HKEx, SZSE and SSE # HKEx figure covers both Mainboard and GEM. The figures for Shanghai and Shenzhen refer to total negotiable capitalisation of both A and B share markets * P/E ratio: HKEx - main board, Shanghai and Shenzhen - A share market Exchange rate (31 Dec 2004) RMB1 = HK$1.0658

33. Mainland institutional investor profile China dimension Mainland institutional investor profile

34. China dimension Mainland institutional investor profile • Major institutional investor types: • securities investment funds • securities firms (proprietary trading and asset management) • insurance companies • trust and investment companies • privately-offered funds • Qualified Foreign Institutional Investors (QFII) • National Social Security Fund (NSSF) • Others (e.g. enterprise pension funds) • Different institutional investors are under the jurisdiction of different regulators and regulatory regimes. • Estimated aggregate investment in the Mainland’s tradable stocks and government bonds exceeds HK$500 billion, around one-third of total market value. • Investment channels and vehicles still subject to quotas and other restrictions

35. China dimension Recent developments of Mainland institutional investors • Market entry of QFII (mid 2003) • Qualified insurance companies allowed to apply certain portion of their foreign exchange balance in overseas investment assets (Aug 2004) • Insurance companies allowed to directly invest in the domestic stock market (Oct 2004) • Regulatory regime governing enterprise pension funds’ investment established (Feb 2005) • Qualified Domestic Institutional Investor (QDII) (for overseas investment by domestic investment funds) under study • Overseas investment channel for NSSF under study

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