The future development of Hong Kong equity market

1. The future development of Hong Kong equity market Facts: HK IPO fund raising size ranked first in 2009 and 2010 Chinese SOEs and increasing NHMPEs Has been the major fund raising centre for Chinese enterprises A significant improvement in corporate governance practices of Chinese enterprises listed in HK (study 1) Hong Kong has good corporate governance standards in the Asia Pacific region (study 2)

2. Vision: • Hong Kong should be a prime market for quality companies (mainland and international) to raise fund

3. Improvement on Corporate governance practices for H-share companies:Research Methodologies Assign a CG score for major listed companies Sponsored by HK Institute of Director 2002, 2005, and 2008 Publicly available information HSI, HSHKCI, HSCCI, and HSCEI constituent stocks Number of listed companies 168 in 2002, 174 in 2005, and 146 in 2008

4. Scorecard Followed The Five OECD Corporate Governance Principles

5. Corporate Governance Performance by Indices 2002 Strong Weak HSI (恒生指數) HSHKCI (恒生香港綜合指數) HSCEI (恒生中國企業指數) HSCCI (恒生香港中資企業指數) 5

6. Corporate Governance Performance by Indices 2008 HSCCI (恒生香港中資企業指數) HSCEI (恒生中國企業指數) HSI (恒生指數) HSHKCI (恒生香港綜合指數) 6

7. Top 10 Best Performing Companies in 2002 (by alphabetical order)

8. Top 10 Best Performing Companies in 2008 (by alphabetical order)

9. 2. HK corporate governance standards with other Asia-pacific marketsMacro Corporate Governance Scorecard* (commissioned by PECC) Two surveys: First survey is on Rules and Regulations on Corporate Governance Based on 5 OECD principles Rights of shareholders Equitable treatment of shareholders Role of shareholders Disclosure and transparency Board responsibilities * Cheung, Y. L., and H. Jang. 2008 "Scorecard on Corporate governance in East Asia: A comparative study" International Finance Review, 9, 415-460.

10. Macro Corporate Governance Scorecard Research team consists of representatives from each East Asian economies, including China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand Institute of Directors or Research Institutes Assistance from the regulatory agency

11. Macro Corporate Governance Scorecard The second survey is on Market perception on corporate governance practice Questionnaire distributed by Investment Fund Association Fund managers and analysts with investment exposure in the region

12. Macro Corporate Governance Scorecard Objectives Two different angles existing regulatory framework on corporate governance Investors perception

13. Rules and Regulations 103 questions 55 are used in the scoring 48 are used for confirmation

14. Rules and Regulations

15. Rules and Regulations

16. Rules and Regulations

17. Rules and Regulations

18. Investor Perception Survey 10 questions 17 fund managers and 8 analysts 1 to 5 point scale

19. Investor Evaluation How do you evaluate overall quality of corporate governance practiced in each county? Shareholder rights are protected. Management respects shareholder value. Accounting reports including annual and semi-annual reports are accurate and reliable. Disclosures are made timely and adequately. Board supervises the management independently and effectively. Rules and regulations on corporate governance are enforced effectively. The financial intermediaries including accountants and auditors can be trusted. Legal system including courts and prosecutors are fair and independent. Foreign investors are equally treated as local investors.

20. Investor Perception

21. Remarks Two surveys yield different results REFORM not only in rules and regulations ALSO in the implementation and enforcement

22. Conclusion: • HK should differentiate our markets from others as an exclusive club for quality listed companies • To build up the brand name with • clear regulatory framework • adequate investor protection • lower cost of capital

23. ~ END ~