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Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing Limited

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. AGENDA Page. The evolving role of Hong Kong as a securities market for the Mainland.

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Paul M Y Chow, Chief Executive Hong Kong Exchanges and Clearing Limited

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  1. 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

  2. AGENDA Page The evolving role of Hong Kong as a securities market for the Mainland 1. Development of Hong Kong’s Mainland role 3 2. Current status 12 3. Challenges 14 4. Outlook 21

  3. 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 2006 1980s 1993 2000 2005 1960-80s • A & H shares simultaneously listed in the Mainland and Hong Kong • Many HK listed companies opened manufacturing operations in Pearl River Delta • HK- or foreign-incorporated China enterprises listed in HK as Red Chips • H-shares launched • Some H-shares and red chips dually listed on HK and overseas markets • Non H-share Mainland private enterprises listed • Very large Mainland enterprises listed • Promote listing of foreign-controlled companies with Mainland operations • Listings of Mainland banks and insurance companies • Mostly British hongs, utility companies & property companies Since 1993, US$190 billion of equity capital has been raised by Mainland enterprises listed in Hong Kong (being 55% of total)

  4. Equity IPO funds raised by Mainland enterprises in Hong Kong (1993 – 2006) The evolving role of Hong Kong as a securities market for the Mainland 1. Development of Hong Kong’s Mainland role Source: HKEx statistics

  5. 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) Source: HKEx statistics

  6. The 10 largest IPOs in Hong Kong since 1993 have all been by Mainland enterprises The evolving role of Hong Kong as a securities market for the Mainland 1. Development of Hong Kong’s Mainland role Source: HKEx statistics

  7. 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

  8. Period-end market capitalisation of Mainland enterprises (Main Board & GEM) (1993 – 2006) The evolving role of Hong Kong as a securities market for the Mainland 1. Development of Hong Kong’s Mainland role Mainland enterprises account for half of Hong Kong’s market capitalisation. Source: HKEx statistics

  9. 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)* *Excluding Derivative Warrants Source: HKEx statistics

  10. 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 2007 1994 2003 2004 2005 • Stock options, futures & warrants for individual Mainland enterprises developed • H-share Index futures launched • H-share Index options launched • iShares FTSE/ Xinhua A50 China Tracker launched • FTSE / Xinhua China 25 futures and options launched • Hang Seng China H-Financials Index futures to be launched • RMB futures to be launched • Derivative warrants with iShares FTSE/ Xinhua A50 China Tracker as underlying launched in March 2007 • Position limits of H-share Index futures and options to be increased Source: HKEx

  11. Quarterly volume and quarter-end open interest of H-shares Index futures and options* (2004 – 2006) (Number of contracts) The evolving role of Hong Kong as a securities market for the Mainland 1. Development of Hong Kong’s Mainland role 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

  12. 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

  13. Mainland enterprises have contributed substantially to the Hong Kong securities market ( figures as at 31 December 2006) The evolving role of Hong Kong as a securities market for the Mainland 2. Current status of Mainland role Mainland Total enterprises % of total Unit No. of listed companies Number 1,173 367 31% 39 Number 62 63% No. of newly listed companies Main Board Number 56 33 59% GEM Number 6 6 100% Market capitalisation 50% HK$bn 13,337.7 6,714.5 Total equity funds raised HK$bn 524.5 384.9 73% 304.2 Funds raised by IPOs HK$bn 333.9 91% Funds raised in secondary market HK$bn 190.7 42% 80.6 Average daily turnover – equity HK$bn 26.2 15.7 60% Source: HKEx statistics

  14. The evolving role of Hong Kong as a securities market for the Mainland • Mainland market revival • Overseas exchange competition • Mainland-Hong Kong market alignment • Hong Kong internal issues 3. CHALLENGES TO HONG KONG’S MAINLAND ROLE

  15. 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 2006 January 2007 – onwards • 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.

  16. Equity funds raised in Mainland China (Shanghai and Shenzhen) compared with Hong Kong (2002 – 2006) The evolving role of Hong Kong as a securities market for the Mainland 3. Challenges to Hong Kong’s Mainland role Source: China Securities Regulatory Commission, Shanghai Stock Exchange and Shenzhen Stock Exchange, HKMA statistics, HKEx statistics

  17. 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

  18. Market share of turnover of Mainland enterprises in Hong Kong and US (2006) The evolving role of Hong Kong as a securities market for the Mainland 3. Challenges to Hong Kong’s Mainland role Hong Kong has more than 80% of the trading in the two markets. Source: HKEx statistics, Reuters

  19. 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.

  20. 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

  21. 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

  22. 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.”

  23. 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 • 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 Business Expansion Service Enterprise • Service mentality • Cost-effectiveness • Focus on customers • Service culture • Internal efficiency/automation • Accountability and organisation structure • Compensation linked to service / staff performance

  24. Ongoing and planned initiatives in 2007: The evolving role of Hong Kong as a securities market for the Mainland 4. Outlook • 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

  25. 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 HKEx focus Market Quality Operate an open, secure, fair, orderly, efficient & transparent marketplace Investor Confidence Market Liquidity Focus on HK, Mainland China and the rest of Asia Focus on business expansion and provision of quality service Order Flow

  26. Thank You!

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