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How Mainland Listings Changed the Landscape of the Hong Kong Securities Market
China and Global Capital Markets: Conference 2006
Paul ChowChief ExecutiveHKExwww.hkex.com.hk
12 May 2006
2
Introduction
The listing of Mainland enterprises has played an important role in the evolution of the Hong Kong securities market in 4 key areas:
1. Listing Regulatory Framework
2. Strengthening our Position as China’s International Financial Centre
3. Broadening the Types of Mainland Related Products
4. HKEx Organisation
3
Agenda
1. Listing Regulatory Framework
2. Strengthening our Position as China’s International Financial Centre
3. Broadening the Types of Mainland Related Products
4. HKEx Organisation
4
A three-tier system regulates the securities market in Hong Kong
Policy maker and legislator
• Sets overall policy direction• Initiates legislation
Government
SFC
HKEx
Statutory regulator
• Administers the SFO and guidelines and codes related to:– Market conduct– Disclosure of Interests– Licensing of financial intermediaries (including corporate
finance advisers)– Takeover, merger and share buybacks
• Regulates SEHK pursuant to the SFO and various MOUs• Regulates listed issuers through the dual filing regime
Frontline regulator
• Sole operator of the exchange-based stock and futures markets, and central clearing houses
• Administers the Listing Rules, Trading Rules & Clearing Rules
• Regulated by the SFC pursuant to the SFO and various MOUs
5
Mainland listings prompted some key regulatory developments in the 1990s
Listing of Red Chips in HK
1980s
June, 1993The first H Share listed in HK
Mandatory Provisions《必備條款》Listing Rules amended to require the articles of associations of PRC issuers to include the new Mandatory Provisions for Companies Listing Overseas 《到境外上市公司章程必備條款》 issued by the State Council Securities Policy Committee and the State Commission for Restructuring the Economic System
Nov, 1994
• Five Parties’ MOU of Regulatory Cooperation The CSRC, Shanghai Stock Exchange, the Shenzhen Stock Exchange, the SFC and the SEHK signed the Memorandum of Regulatory Cooperation in Beijing
• Renminbi denominated shares & reconciliation of accountsIntroduced Chapter 19A and Appendix 13D to the Listing Rules to– enable listing of Renminbi denominated shares (H shares)– require the financial reports of H-Share companies to reconcile with the Hong Kong requirements
HKEx-participated initiatives
6
Since 2000, major regulatory initiatives were implemented to further improve market quality
Apr 2003
Mar 2004
Jan 2005
Enactment of SFOSFO consolidated and modernised 10 previous ordinances regulating the securities and futures market
Initial Listing Criteriaand Continuing ObligationsListing Rules amended on :• Track record period (profit / market capitalisation) requirements• Public float requirements• Financial reporting obligations• Definitions and tests in connected and notifiable transactions
Corporate Governance matters:Listing Rules amended to adopt the Code of Corporate Governance Practices• Introduced “Code vs Recommended Best
Practice” system• Require issuers to include Corporate Governance
Reports in annual reports
Apr 2001
Acceptance of IAS and USGAPPListing Rules amended to accept IAS and US GAPP
May 2001
H Share’s Trading CurrencyListing Rules amended to allow H Shares to be subscribed for and traded in currencies other than HKD
HKFRS harmonised with IFRS
HKEx-participated initiatives
7
Agenda
1. Listing Regulatory Framework
2. Strengthening our Position as China’s International Financial Centre
3. Broadening the Types of Mainland Related Products
4. HKEx Organisation
8
Mainland listings make their mark
1980’sListing of Red Chips
19936 H shares listed(Total fund raised:HKD 8.142bn)
199415 H shares listedby end of 1994
April 30, 2006344 Mainland enterpriseslisted+ over 250 MOEs
More POEs joined the market
2000Mainlandenterpriseslisted on GEM
Listing of mainly large SOEs; selected by Mainland govt
All sizes of SOEs + POEs
SOEs: State-owned EnterprisesPOEs: Privately-owned EnterprisesMOEs: Mainland-operating Enterprises
9
Mainland listings have broadened the industry composition of the listed companies in Hong Kong
Source: HKEx
1997 20001993
• Iron / Steel manufacturing
• Automobile manufacturing
• Ship building
• Oil and gas;• Water treatment plant;• Satellite telecommunication
operator• Gas pipelines constructor• Copper mining• Toll roads
• More banks • More
insurance companies
• Production of grape wine / spirits
• Supermarket operator
• Gold mining• Dairy products• Ports
• Coal Mining• Airport
2005
10
Mainland enterprises listed in Hong Kong have grown in number and significance
Market Total1996
end of Dec
(% of total)
2006
end of Apr
(% of total)
Increase over the
period
Number of Listed Companies 583 1,143
Mainland Companies 64 (11%) 344 (30%) 438%
Market Cap (HK$ billion) 3,476 9,758
Mainland Companies 295 (8.5%) 4,053 (42%) 1,274%
11
Rank CompanyListing date Type
Fund raised
(HK$mn)
1 China Construction Bank 27 Oct 2005 H share 71,578
2 China Unicom 22 Jun 2000 Red Chip 43,608
3 China Mobile 23 Oct 1997 Red Chip 32,665
4 China Life 18 Dec 2003 H share 26,714
5 Sinopec 19 Oct 2000 H share 26,681
6 China Shenhua Energy 15 Jun 2005 H share 22,976
7 PetroChina 7 Apr 2000 H share 22,330
8 BOC Hong Kong 25 Jul 2002 Red Chip 20,516
9 Bank of Communications 23 Jun 2005 H share 16,835
10 Ping An Insurance 24 Jun 2004 Red Chip 14,337
Source: HKEx
Top IPOs are all by Mainland enterprises
Top 10 listed companies by market cap as at Apr 06
12
-
20
40
60
80
100
120
140
160
180
IPO1996
PostIPO1996
IPO2005
PostIPO2005
Non-MainlandEnterprises
Mainland Enterprises
Hong Kong has become a major capital formation centre for both Mainland and non-Mainland enterprises
1996(HK$ bil)
2005(HK$ bil)
IPO fund raised – Mainland enterprises
10 151 ( 1,369%)
IPO fund raised –Non-Mainland enterprises
21 15( 29%)
Post-IPO fund raised – Mainland enterprises
17 47( 185%)
Post-IPO fund raised – Non-Mainland enterprises
52 88( 69%)
Total fund raised by Mainland enterprises
27 198 ( 636%)
Source: HKEx
Fund raised(HK$ bil)
31
69
166
136
67%
76%
91%
35%
65%
9%
24%33%
9%
13
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1996 2005 Jan-Apr2006
Daily DW Turnover of Non-ME
Daily DW Turnover of ME
Daily equity Turnover of Non-ME
Daily equity Turnover of ME
Shares of Mainland enterprises are traded actively
1996(HK$ mn)
2005(HK$ mn)
Jan – Apr 2006
(HK$ mn)
Daily DW turnover of Non-ME
454 2,752 ( 505%)
4,130 ( 50%)
Daily DW turnover of ME
48 845 (1663%)
2,311 (173%)
Daily equity turnover of Non-ME
4,524 7,907 (75%)
11,222 (42%)
Daily equity turnover of ME
645 6,708 (940%)
14,965 (123%)
Daily total market turnover
5,672 18,211 (221%)
32,627 (79%)
Source: HKEx
11%
Daily Turnover
(HK$ mn)
80%
8%
37%
43%
15%5%
46%
34%
13%
7%
0.8%
14
Agenda
1. Listing Regulatory Framework
2. Strengthening our Position as China’s International Financial Centre
3. Broadening the Types of Mainland Related Products
4. HKEx Organisation
15
Mainland-related derivatives products were offered to investors
2005
FTSE/Xinhua China 25 Futures and Options launched
2003
H-share Index Futures launched
2004
• H-share Index Options launched
• iShares FTSE/ Xinhua A50 China Tracker launched
1994
Stock options, futures & warrants for individual Mainland enterprises developed
Source: HKEx
16
These products are actively traded
Source: HKEx
43,683 45,018
59,011
79,472
103,573
Options FY05 Jan-Apr 06
Hang Seng Index options 12% 9%
H-share Index options 1% 1%
Stock options (43 series)
Mainland enterprises (21 series)
13% 19%
Others (22 series) 21% 22%
Other options <0.5% <0.5%
Average daily no. of contracts
155,345
45%
55%
44%
56%
44%
56%
39%
61%
47%
53%
52%
48%
Futures FY05 Jan-Apr 06
Hang Seng Index futures 39% 31%
H-share Index futures 8% 12%
Mini HSI futures 6% 5%
Other futures <0.5% <0.5%
Other options include Mini Hang Seng Index options, FTSE/Xinhua China 25 Index optionsOther futures: FTSE/Xinhua China 25 Index futures, stock futures, 1&3-month Hibor futures and 3-year Exchange Fund Note futures
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
2001 2002 2003 2004 2005 Jan - Apr2006
Options
Futures
17
Agenda
1. Listing Regulatory Framework
2. Strengthening our Position as China’s International Financial Centre
3. Broadening the Types of Mainland Related Products
4. HKEx Organisation
18
HKEx has enhanced its organisation to further improve its partnership with the Mainland
1. Established the Business Development Division (formerly the China Development and Listing Promotion Department), responsible for promoting new listings in Hong Kong through conducting conferences and meetings with prospective issuers
a. Set up the Beijing Representative Office in 2003
b. Appointed Special Representatives to station in Guangzhou and Shanghai in 2004
2. Formed the China Affairs Team in the Listing Division in January 2006
a. Liaise with the Mainland authorities and exchanges
b. Coordinate regular training seminars and workshops for Hong Kong-listed Mainland enterprises
19
Conclusion: Hong Kong is now China’s international financial centre
More international funds, more
trading activities
AnInternational
Financial VenueIn the 70’s &
80’s, the market was dominated by British hongs and local companies
Hong Kong market - becomes more international as we attract more international funds with the listing of Mainland enterprises
Mainland enterprises - listing in Hong Kong helps Mainland enterprises to move towards international standards
Market grew rapidly with the listing of Mainland enterprises
HKMarket
HK + MainlandListings
In view of our market quality and to capitalize on the high growth of Mainland economy, we expect that more international investors would be attracted to invest in our market
20
Conclusion:To be successful over the long term, HKEx is committed to continuously enhancing market quality
Market QualityMarket Quality
InvestorConfidence
InvestorConfidence
OrderFlow
OrderFlow
Market Liquidity
Market Liquidity
an open, secure, fair, orderly, efficient and
transparent marketplace
21
Thank You