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

Paul M Y Chow, Chief Executive

Hong Kong Exchanges and Clearing Limited

at University of Hong Kong luncheon on 12 March 2007

THE EVOLVING ROLE OF HONG KONG AS A SECURITIES MARKET FOR THE MAINLAND

2

AGENDA Page

1. Development of Hong Kong’s Mainland role 3

2. Current status 12

3. Challenges 14

4. Outlook 21

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

3

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

Since 1993, US$190 billion of equity capital has been raised by Mainland enterprises listed in Hong Kong (being 55% of total)

Many HK listed companies opened manufacturing operations in Pearl River Delta

HK- or foreign-incorporated China enterprises listed in HK as Red Chips

1980s 1993

H-shares launched

Some H-shares and red chips dually listed on HK and overseas markets

2000

Non H-share Mainland private enterprises listed

Very large Mainland enterprises listed

Mostly British hongs, utility companies & property companies

1960-80s 2005

Promote listing of foreign-controlled companies with Mainland operations

Listings of Mainland banks and insurance companies

2006

A & H shares simultaneously listed in the Mainland and Hong Kong


4

Equity IPO funds raised by Mainland enterprises in Hong Kong (1993 – 2006)

Source: HKEx statistics


1. Development of Hong Kong’s Mainland role

304

151

77

5140

20

100

71

3 7104119

31%

66%

44%

33%

87%

58%

42%

87%

75%

77%

77%

79%

91% 91%

0

50

100

150

200

250

300

350

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

HK$ bn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total IPOs by Mainland enterprises % of all IPOs

5

Number of listed Mainland enterprises in Hong Kong (1993-2006)



3855 58

69

101112

124142

168

214

249

304

335

367

0

50

100

150

200

250

300

350

400

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

No.

of

Lis

ted

Mai

nlan

d E

nter

pris

es


6

The 10 largest IPOs in Hong Kong since 1993 have all been by Mainland enterprises

Ranking CompanyCapital raised

(HK$bn)Date of listing

1. Industrial and Commercial Bank of China Ltd. –H shares 125.0 27/10/2006

2. Bank of China Ltd. – H Shares 86.7 01/06/2006

3. China Construction Bank Corporation – H Shares 71.6 27/10/2005

4. China Unicom Ltd. 43.6 22/06/2000

5. China Mobile Ltd. 32.7 23/10/1997

6. China Life Insurance Co. Ltd. – H Shares 26.7 18/12/2003

7. China Petroleum & Chemical Corporation – H Shares 26.7 19/10/2000

8. China Shenhua Energy Co. Ltd. – H Shares 25.5 15/06/2005

9. PetroChina Co. Ltd. – H Shares 22.3 07/04/2000

10. China Merchants Bank Co. Ltd. – H Shares 20.7 22/09/2006




7

Denotes companies with Mainland China interests

The growing Mainland dimension is illustrated by changes in our top 15 companies by capitalisation1973

Hongkong Bank

HK Land

Jardine Matheson

Hutchison Intern’lE.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



Source: HKEx

8

Period-end market capitalisation of Mainland enterprises (Main Board & GEM) (1993 – 2006)

Mainland enterprises account for half of Hong Kong’s market capitalisation.

128295

522 373

1,0051,309

1,049 982

1,6802,020

6,714

144 105

3,192

(367)(335)(304)(249)(214)(168)(142)(124)(112)(71)(60)(57) (40) (101)

5% 5% 5%

9%

16%14%

21%

27% 27% 27%

30% 30%

50%

39%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

HK$ bn

-5%

5%

15%

25%

35%

45%

55%

Market capitalisation of China-related stocks (H shares,red chips and non-H-share private enterprises)% of market total




9

Total annual turnover of Mainland enterprises and their contribution to the overall Hong Kong market turnover (1993-2006)*



*Excluding Derivative Warrants*Excluding Derivative Warrants


122 92 63161

1344

444 461

866 787

499

1052

1665 1657

3879

11%9% 8%

12%

38%

28%26%

29%

42%

33%

46%49%

46%

60%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Tur

nove

r (H

K$

bn)

0%

10%

20%

30%

40%

50%

60%

70%

Turnover of Mainland enterprises Contribution to total market turnover

10

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

2007

• 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

Since the 1994, HKEx has broadened the range of Mainland related product offerings



Source: HKEx

502 461 488 528 649 572 1,198 1,562 1,256 1,623520339

419

341

205

38

277

222

92109

352

62

193

141

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Q1 0

4

Q2 0

4

Q3 0

4

Q4 0

4

Q1 0

5

Q2 0

5

Q3 0

5

Q4 0

5

Q1 0

6

Q2 0

6

Q3 0

6

Q4 0

6

Turn

over

volu

me

('000 c

ontr

acts

)

0

50

100

150

200

250

300

350

400

450

Op

en i

nte

rest

('0

00

co

ntr

acts

)

Aggregate volume

Aggregate open interest

11

Quarterly volume and quarter-end open interest of H-shares Index futures and options* (2004 – 2006) (Number of contracts)

* H-shares Index futures were introduced on 8 December 2003 and options were introduced on 14 June 2004.

H-share futures and options are growing in popularity.




12

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

2. CURRENT STATUS OF MAINLAND ROLE


13

Mainland enterprises have contributed substantially to the Hong Kong securities market ( figures as at 31 December 2006)

Unit TotalMainland

enterprises % of total

No. of listed companies Number 1,173 367

No. of newly listed companies Number 62

Main Board Number 56

GEM Number 6

Market capitalisation HK$bn 13,337.7 6,714.5

Total equity funds raised HK$bn 524.5 384.9

Funds raised by IPOs HK$bn 333.9 304.2

Funds raised in secondary market HK$bn 190.7 80.6

Average daily turnover – equity HK$bn 26.2

31%

100%

50%

73%

91%

42%

60%

63%

59%

39

33

6

15.7


2. Current status of Mainland role


14

Mainland market revival

Overseas exchange competition

Mainland-Hong Kong market alignment

Hong Kong internal issues

3. CHALLENGES TO HONG KONG’S MAINLAND ROLE


15

Challenge 1: Mainland market revival


3. Challenges to Hong Kong’s Mainland role

• 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

January 2006 January 2007 – onwards

A dramatic change in just one year.

16

Equity funds raised in Mainland China (Shanghai and Shenzhen) compared with Hong Kong (2002 – 2006)

Source: China Securities Regulatory Commission, Shanghai Stock Exchange and Shenzhen Stock Exchange, HKMA statistics, HKEx statistics

31

109 11014

28

36 39

67

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006

(US$bn)

Mainland China Hong Kong



17

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

Challenge 2: Overseas exchange competition



18

Market share of turnover of Mainland enterprises in Hong Kong and US (2006)

Hong Kong has more than 80% of the trading in the two markets.

Hong Kong(81.6%,

HK$1,486 bn)

US(18.4%, HK$335 bn)



Source: HKEx statistics, Reuters

19

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

Challenge 3: Mainland-Hong Kong market alignment

Improved information flow may be the best solution in the medium term.



20

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

Challenge 4: Hong Kong internal issues



21

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

4. OUTLOOK


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

Mainland Positioning

• China’s international exchange

• Complements Mainland exchanges

• Partners Mainland

Meaning Initiatives

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

• Service mentality• Cost-effectiveness• Focus on customers

• Collaboration with Mainland authorities and exchanges

• RMB-related products• A&H shares listing and information exchange• Mainland intermediaries and issuers

Business Expansion

Service Enterprise

• Seeking new businesses and customers

• Seeking more business from existing customers

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

performance

Themes

The new strategy places emphasis on Hong Kong’s positioning as Mainland’s international financial centre


4. Outlook

24

Ongoing and planned initiatives in 2007:

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


4. Outlook

25

HKEx is committed to building a quality market which will continue to strengthen its role as the securities market for the Mainland

Market Quality

Market Quality

InvestorConfidence

InvestorConfidence

OrderFlow

OrderFlow

Market Liquidity

Market Liquidity

Success of a securities market HKEx focus

Focus on business expansion and provision of quality service

Focus on HK, Mainland China and the rest of Asia

Operate an open, secure, fair, orderly, efficient & transparent marketplace

Goal

Geographical focus

Business focus


4. Outlook

Thank You!

26

Documents

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