Paul M Y Chow, Chief Executive

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 Kongs 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 KONGS 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
1960-80s
2005

• 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

• Mostly British hongs, utility companies
  property companies

• Promote listing of foreign-controlled companies
  with Mainland operations
• Listings of Mainland banks and insurance companies

Since 1993, US190 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
Kongs Mainland role
Source HKEx statistics
5
The evolving role of Hong Kong as a securities
market for the Mainland 1. Development of Hong
Kongs 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
Kongs Mainland role
Source HKEx statistics
7
The evolving role of Hong Kong as a securities
market for the Mainland 1. Development of Hong
Kongs 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 Internl 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
Kongs Mainland role
Mainland enterprises account for half of Hong
Kongs market capitalisation.
Source HKEx statistics
9
The evolving role of Hong Kong as a securities
market for the Mainland 1. Development of Hong
Kongs 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
Kongs Mainland role
Since the 1994, HKEx has broadened the range of
Mainland related product offerings
2007
2005
2003
2004
1994

• FTSE / Xinhua China 25 futures and options
  launched

• H-share Index futures launched

• H-share Index options launched
• iShares FTSE/ Xinhua A50 China Tracker launched

• Stock options, futures warrants for individual
  Mainland enterprises developed

• 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
Kongs 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 Londons
• ? 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
Unit
Total
enterprises
of total
No. of listed companies
Number
1,173
367
31
39
No. of newly listed companies
Number
62
63
Main Board
Number
56
59
33
GEM
Number
6
100
6
Market capitalisation
HKbn
13,337.7
6,714.5
50
Total equity funds raised
HKbn
524.5
384.9
73
Funds raised by IPOs
HKbn
333.9
304.2
91
Funds raised in secondary market
HKbn
190.7
80.6
42
Average daily turnover equity
HKbn
26.2
60
15.7
Source HKEx statistics
14
The evolving role of Hong Kong as a securities
market for the Mainland
3. CHALLENGES TO HONG KONGS MAINLAND ROLE

• Mainland market revival
• Overseas exchange competition
• Mainland-Hong Kong market alignment
• Hong Kong internal issues

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The evolving role of Hong Kong as a securities
market for the Mainland 3. Challenges to Hong
Kongs 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
Kongs 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
Kongs 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 lions 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
Kongs 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
Kongs Mainland role
Challenge 3 Mainland-Hong Kong market alignment

• Simultaneous AH 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 others 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.
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The evolving role of Hong Kong as a securities
market for the Mainland 3. Challenges to Hong
Kongs 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 Kongs 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

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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

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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 Kongs
positioning as Mainlands international financial
centre
Meaning
Initiatives
Themes
Mainland Positioning

• Chinas international exchange
• Complements Mainland exchanges
• Partners Mainland

• Collaboration with Mainland authorities and
  exchanges
• RMB-related products
• AH shares listing and information exchange
• Mainland intermediaries and issuers

• Overseas issuers (Mainland nexus)
• Commodity and emissions-related products
• Asian focus
• New cash and derivatives products
• Address barriers to the securities market

• Seeking new businesses and customers
• Seeking more business from existing customers

Business Expansion

• Service mentality
• Cost-effectiveness
• Focus on customers

Service Enterprise

• Service culture
• Internal efficiency/automation
• Accountability and organisation structure
• Compensation linked to service / staff performance

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

• Formation of the AH 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

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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
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Thank You!