How Mainland Listings Changed the Landscape of the Hong Kong Securities Market China and Global Capital Markets: Conference 2006 Paul Chow Chief Executive.

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