Future Development of China ’ s Capital Market: Role of Hong Kong

1. Future Development of China’s Capital Market: Role of Hong Kong Stephen Y. L. Cheung Professor (Chair) of Finance Department of Economics and Finance City University of Hong Kong

2. Role of Hong Kong – A Fund Raising Center for Chinese Enterprises • As the end of December 2002, 74 H-shares and 72 red-chips were listed in Hong Kong. • From 1993 to 2002, total funds raised by Chinese companies amounted to US$ 92 Billion Source: http://www.investhk.gov.hk/ Future Development of China's Capital Markets

3. Market Capitalization (China Factor) Source: Stock Exchange Fact Book 2002 Future Development of China's Capital Markets

4. World Wide Ranking Future Development of China's Capital Markets

5. Problems with Listed Companies • Information disclosure is untrue • Prospectus, listing, right issue, and annual reports; major left-outs, false statements, and misguiding information • Change the purpose of the funds raised • False appraisal, financial, and manipulation of share prices Future Development of China's Capital Markets

6. Problems with Listed Companies • High-risk companies • Some companies with good financial data, but very risky, example 銀廣廈 Future Development of China's Capital Markets

7. Problems with Listed Companies • Controlling shareholders • Connected parties transactions • Listed companies provide loan guarantee for controlling shareholders • ‘ATM’ machine for controlling shareholders, example 猴王事件 Future Development of China's Capital Markets

8. Causes of Problems • Unsound corporate governance structure • Inadequacy of accounting standards • Poor accounting and auditing services • Lack of proper litigation system • Poor law enforcement Future Development of China's Capital Markets

9. Case Study • Yin Chuan Guangxia（銀廣廈） • Euro-Asia Agricultural（歐亞農業） Future Development of China's Capital Markets

10. Case 1 • Yin Chuan Guangxia （銀廣廈） • Stock code: 000557; currently ST • Listed in 1994 • 3 right issues with 0.57 billion • In August 2001, CSRC discovered • False accounting numbers from its subsidiary company Guangxia in Tianjin • From purchase of raw materials, sales, exports, Tianjin Guangxia ‘fabricate’ all receipts, including sale contracts and export contracts • From 2 million in 1995 to 0.5 billion in 2000 Future Development of China's Capital Markets

11. Case 1 • Yin Chuan Guangxia • Its accounting firm was involved • Its accountant believed a Hi-Tech company could make big profits • On October 9, 2001, the company resumed trading, stock price dropped from $30.79 to $6.59 – 6.8 billion of market capitalization disappeared Future Development of China's Capital Markets

12. Case 2 • Euro-Asia Agriculture (歐亞農業) • In October, 2002, occurred cash flow problem • Resignation of senior management, auditor, financial advisor • Prior to listing, its reported turnover of 2.1billion RMB differs from 0.1 billion with the mainland tax authority Future Development of China's Capital Markets

13. Case 2 • The drop of Euro-Asia’s stock price made HK$ 1.2 billion disappear in the Hong Kong market Future Development of China's Capital Markets

14. Corporate Governance Reform • Securities and Futures Ordinance • Listing Rules Future Development of China's Capital Markets

15. Further Development • QFII • QDII • CDR Future Development of China's Capital Markets

16. Concerns • Regulators • Loss of Foreign Reserve • Market Development • Less Speculative Future Development of China's Capital Markets

17. Concerns – P/E Ratio Source: Stock Exchange Fact Book 2002 Future Development of China's Capital Markets

18. Concerns • Investors • More choices • Small shareholders’ interest can be better protected Future Development of China's Capital Markets

19. Concerns • Listed Companies (China) • Rising competition • Better corporate governance practice Future Development of China's Capital Markets

20. Concerns • Listed Companies (Hong Kong) • Access to RMB funding Future Development of China's Capital Markets

21. The End Thank You