L07 HK Stock Exchange_A Glimpse of the Past

HONG KONG EXCHANGES AND CLEARING LIMITED12/F One International Finance Centre, 1 Harbour View Street, Central, Hong Kong

Tel: (852) 2522 1122

Fax: (852) 2295 3106

Website: www.hkex.com.hk

E-mail: [email protected]

May 2011

Disclaimer:

HKEx and/or its subsidiaries endeavour to ensure the accuracy and reliability of the

information contained in this booklet, but do not guarantee its accuracy and accept no

liability (whether in tort or contract or otherwise) for any loss or damage arising from any

inaccuracy or omission.

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1841-1960

Hong Kong was first ceded to Britain in 1841 by the Treaty of Chuen Pi and the Treaty of Nanking confirmed the cession in 1842. During its first 50 years as a British colony, Hong Kong developed from a largely uninhabited island into a prosperous community of about 225,000 people.

The 1860s were a period of great prosperity for Hong Kong. During this decade, the Hongkong and Shanghai Banking Corporation (later to become HSBC) was formed and Hong Kong’s first Companies Ordinance was passed.

Securities trading had almost certainly begun in Hong Kong after the passage of the first Companies Ordinance in 1865 which allowed the formation of companies with limited liability.

The first formal stock exchange, the Association of Stockbrokers in Hong Kong, was formed in 1891 to bring order and certainty to the market. It was renamed the Hong Kong Stock Exchange in 1914. The exchange at that time had no Chinese members and an all-Chinese stock exchange, the Hong Kong Sharebrokers’ Association, was formed on 1 October 1921.

Following the end of the Second World War, the two exchanges merged to form the new Hong Kong Stock Exchange. The need for the merger was brought about as too few members had returned after the war. Trading was initially thin and dealing was expensive. There were no disclosure rules and insider dealing was not uncommon.

The industrialisation of Hong Kong in the post-war period was mainly financed by internal resources or bank loans rather than through the stock exchange. A high level of liquidity helped fuel a boom in property in the 1950s and led to the rise in the value of listed companies, many of which were substantial property owners.

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1960 – 1985

1960 – 1973

The new decade marked an era of confidence and growth. Hong Kong’s infrastructure developed rapidly and manufacturers benefited from an inexpensive and skilled pool of labour. There was a mushrooming of industries and the financial sector became increasingly active. Share issues were heavily over-subscribed and share trading boomed in the early 1960s.

Prompted by the listing of a greater variety of companies in different industries, the Hang Seng Index (HSI) was made public on 24 November 1969. The index was started as an in-house guide by Hang Seng Bank in 1964 based on the performance of 33 representative stocks.

The rapid growth of the Hong Kong economy led to the establishment of three other exchanges, namely, the Far East Exchange (17 December 1969), the Kam Ngan Stock Exchange (15 March 1971) and the Kowloon Stock Exchange (5 January 1972). On 8 January 1973, the four stock exchanges decided to standardise their trading sessions.

In February 1973, the establishment of further stock exchanges was controlled by the enactment of the Stock Exchange Control Ordinance.

In the early 1970s new issues appeared almost daily. The HSI kept rising and reached a high of 1774.96 points on 9 March 1973 from less than 700 points only four months earlier. Towards the end of 1973, however, the bubble began to burst with the HSI plunging to about 433 points. By end of December the following year, it was 177.11 points.

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1974 – 1985

After the stock market crash of 1973, the Securities Ordinance and the Protection of Investors Ordinance came into effect on 1 March 1974 to better protect investors.

In 1976, the Commodity Trading Ordinance was passed in August and the Hong Kong Commodity Exchange was formed on 17 December. At that time, the main products traded on it were cotton futures, sugar futures, soybean futures and gold futures.

In 1977, a working party to consider the unification of the four stock exchanges was formed. As a result, the proposed unified exchange, the Stock Exchange of Hong Kong (Stock Exchange), was incorporated on 7 July 1980.

The governments of the United Kingdom and Mainland China initiated talks regarding the sovereignty of Hong Kong in 1982, which led to the eventual transfer of sovereignty in 1997. The HSI fell to a year low of 676.30 points on 2 December 1982. Amid a crisis of confidence stemming from uncertainties about Hong Kong’s future after 1997, the Government took measures to strengthen the Hong Kong dollar. In 1983, the Hong Kong dollar was linked to the US dollar at $7.80 and, a year later, in 1984, the Sino-British Joint Declaration on the future of Hong Kong was signed.

The Hong Kong Commodity Exchange was renamed the Hong Kong Futures Exchange (Futures Exchange) on 7 May 1985.

As the economy continued to grow, the HSI rose to 1752.45 points by the end of 1985.

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1986 – 1999

1986 – 1989

The four exchanges ceased trading after the close of business on 27 March 1986 and the unified Stock Exchange of Hong Kong (Stock Exchange) commenced trading on 2 April that year.

The Futures Exchange launched its flagship product on 6 May 1986, the HSI Futures, which is still its most popular futures product today.

In September 1986, the Stock Exchange received full membership of the Federation Internationale des Bourses de Valeurs (the International Federation of Stock Exchanges, which is now known as the World Federation of Exchanges). On 24 September, the HSI closed above 2000 points for the first time on solid buying interest from local and overseas investors.

A long bull run took the HSI to a high of 3968.70 points on 1 October 1987 – a level not to be seen for another four years. On 16 October 1987, Black Friday, global markets crashed. The Monday (19 October) that followed was known as Black Monday in Hong Kong as the market dived to 3362.39 points at the close.

The Stock Exchange suspended trading for four days from20 October to 23 October 1987 and trading in the HSI Futures was also suspended. Confidence in the market was affected and when the market reopened on 26 October, the HSI plunged about 43 per cent in one day.

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After the market crash of October 1987, the Stock Exchange underwent fundamental reform. A 22-member Council of the Stock Exchange and a strong, professional execut ive management team were establ ished to safeguard the interests of market participants and improve market operations.

In March 1989, the Hong Kong Securities Clearing Company (HKSCC) was formed to operate a central clearing and settlement system for securities transactions. Prior to 1989, all trades executed on the Futures Exchange were cleared and guaranteed by contracted agents.

The Securities and Futures Commission (SFC), a statutory body with wide-ranging powers of regulation over the securities and futures business, was established on 1 May 1989.

On 15 May 1989, the HSI closed at 3309.64 points, having recovered more than 75 per cent from a year low of 1876.18 points on 7 December 1987. The Stock Exchange continued to develop as a major international stock exchange.

1990 – 1996

In the 1990s, Hong Kong started to benefit from the opening of the Mainland market. Hai Hong Holdings Company was the first Hong Kong-incorporated Mainland enterprise, or red chip, to list its shares through an IPO on the Stock Exchange in July 1992. On 15 July the following year, the first H-share company (a Mainland-incorporated enterprise), Tsingtao Brewery Company, commenced trading in Hong Kong.

The range of products traded on the Stock Exchange and the Futures Exchange continued to expand as trading systems advanced.

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On 24 June 1992, the Central Clearing and Settlement System (CCASS) commenced operations on a trade-for-trade basis. Continuous net settlement was implemented in October. The launch of CCASS helped prevent settlement backlogs and enabled the Stock Exchange to cope with greatly increased trading with the introduction of the Automatic Order Matching and Execution System (AMS) the following year.

The Futures Exchange introduced HSI options on 5 March 1993 and stock futures on 31 March 1995. Stock options contracts were introduced by the Stock Exchange in September 1995 and trading of Rolling Forex currency futures on the futures market started in November that year.

The Futures Exchange introduced the first electronic screen-based trading system, the Automated Trading System (ATS) in November 1995. With the rapid development in technology, securities trading was also upgraded with AMS/2 terminals, which allowed for off-floor trading from 25 January 1996. Terminals installed in securities brokers’ offices enabled them to execute trades from their offices, in addition to the Trading Hall.

1997 – 1999

The collapse of the Thai baht on 2 July 1997 and the start of the Asian Financial Crisis came a day after Mainland China resumed sovereignty over Hong Kong.

At f i rst, Hong Kong seemed relat ively immune as speculators bet there would be an influx of hot money from the Mainland to boost Hong Kong’s economy. On 7 August 1997, the HSI reached a high of 16820.31 points.

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However, in October 1997, the Hong Kong dollar – pegged to the US dollar – came under significant speculative pressure and the HSI dropped to a low of 12967.82 points on 20 October and then to 9766.72 points on 23 October.

As inter-bank rates continued to be volatile, the HSI bottomed at 6544.79 points on 13 August 1998. The Government injected about $120 billion to buy blue chips in defence of the pegged exchange rate. The HSI rebounded to about the 8000 level in two weeks. Subsequently, the HSI rose steadily. The Government started to divest itself from the position in 2001, making a significant profit in the process.

Starting from June 1996, the Stock Exchange appointed a working group on new market development with a brief to explore the potential for a second board as well as for regional products. In a related development, in 1996, the Stock Exchange launched a consultation on market-making and other proposals to improve the market for second line stocks. However, there were few and diverse responses to the consultation, so the Stock Exchange shelved the initiative.

The Government’s drive to support the development of technology industries and small and medium-sized enterprises in Hong Kong brought a new impetus to the second board idea. The Chief Executive’s 1998 Policy Address supported the establishment of a “venture board for smaller and emerging technology companies’ stocks”. In May 1998, the Stock Exchange released a consultation paper on a proposed second market for emerging companies. The proposed second market was to be an alternative market to the Main Board and would target sophisticated investors.

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On 15 November 1999, the Stock Exchange launched a second board, the Growth Enterprise Market (GEM), to cater for companies which did not have the necessary profit track record to be listed on the Main Board of the Stock Exchange. The launch of GEM in 1999 soon caught up with the global tech boom. There was considerable growth in so-called e-businesses and i-businesses across the world as well as in Hong Kong, sectors of the economy that did not exist before. Along with its fellow second markets, GEM attracted these fast-evolving sectors. The first GEM listing took place on25 November 1999. As at the end of March 2000, the market had attracted 18 listings, with a number of them engaged in new-economy businesses.

Hong Kong’s Financial Secretary announced in March 1999 a comprehensive reform of the securities and futures markets to enhance Hong Kong’s competitiveness in an increasingly global financial marketplace. The reform changed the market structure and merged the five recognised and approved market operators in Hong Kong – the Stock Exchange, the Futures Exchange and their respective clearing houses – under a single holding company, Hong Kong Exchanges and Clearing Limited (HKEx).

The merger of the Exchanges was effected by way of schemes of arrangement between the Exchanges and their respective shareholders pursuant to which the then existing shares of the Exchanges were cancelled and, in consideration, the shareholders received shares in HKEx. The required legislative provisions for effecting the merger, including turning HKSCC into a company limited by shares and a wholly owned subsidiary of HKEx, were provided through the passing of the Merger Ordinance.

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2000 – PRESENT

The Stock Exchange, the Futures Exchange and the HKSCC were demutualised and merged to become wholly owned subsidiaries of Hong Kong Exchanges and Clearing Limited (HKEx) on 6 March 2000.

Prior to the merger it was necessary to hold a share in the Stock Exchange or Futures Exchange in order to trade on or through its facilities. Furthermore, shareholders in the Exchanges had certain rights attached to their shareholdings, including voting rights at the Exchange’s general meetings. However, they had no right to participate in the profits of the Exchanges.

As a result of the merger, the shareholders of the Exchanges effectively exchanged their ownership rights in the Exchanges for economic interests in HKEx and the conventional right to receive dividends. Additionally, the existing trading rights of the shareholders remained unaffected with each shareholder being granted one Trading Right on the relevant Exchange for each share of that Exchange held immediately prior to the completion of the merger.

The function of prudential regulation of Stock Exchange Participants was transferred to the SFC upon the merger. Similarly, primary responsibility for the routine inspection of the businesses of Exchange Participants, monitoring their compliance with conduct rules and liquid capital requirements, and ensuring that they have proper systems of management and control in place was transferred to the SFC.

On 28 March 2000, the HSI reached a historical high of 18397.57 points.

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HKEx became one of the first stock exchanges in the world to go public. Its shares were listed by way of introduction on the Stock Exchange on 27 June 2000 with the auspicious stock code of “388”.

An upgraded version of the ATS system, renamed the Hong Kong Futures Automated Trading System (HKATS), became the electronic trading platform for all products traded on the Futures Exchange. Following the migration from an open outcry system to electronic trading on 5 June 2000, floor trading on the Futures Exchange was abolished.

MTR Corporation (MTRC) was the first government-owned organisation to be privatised. Its shares were listed on the Main Board on 5 October 2000.

To enhance trading and clearing systems, HKEx launched the Third Generation Automatic Order Matching and Execution System (AMS/3) on 23 October 2000 and introduced the new generation of the Central Clearing and Settlement System (CCASS/3) on 16 May 2002.

The Securities and Futures Ordinance (SFO) together with a number of codes and guidelines came into effect on 1 April 2003. On the same day, the minimum commission rate was abolished. Commissions were freely negotiated between Exchange Participants and their clients.

Following the signing of the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Mainland in June 2003, HKEx opened its first Mainland representative office in Beijing on 17 November 2003.

Hang Seng China Enterprises Index (H-shares Index) Futures and Options Contract were introduced on 8 December 2003 and 14 June 2004.

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The H shares of Bank of Communications were listed on 23 June 2005. It was the first Mainland-incorporated commercial bank to be listed outside the Mainland.

On 18 October 2005, the third phase of the Closer Economic Partnership Arrangement (CEPA III) was signed under which qualified Mainland securities and futures companies were permitted to establish branches in Hong Kong.

Also in October 2005, China Construct ion Bank Corporation (CCB) chose to list in Hong Kong, making it the first of the Mainland’s four state-owned commercial banks to list its shares, all of which are freely tradable. The bank raised $71.6 billion through its initial public offering (IPO), which was the largest in Hong Kong’s history.

The Link Real Estate Investment Trust (The Link REIT) was listed on 25 November 2005. It was the first REIT to be listed in Hong Kong and was the largest IPO by a REIT in the world in terms of the amount raised.

The renovated Trading Hall, featuring 294 trading booths, became operational on 16 January 2006. The new Exchange Exhibition Hall opened on 26 April 2006. The Exchange Exhibition Hall is designed to help local and overseas visitors better understand Hong Kong’s securities and derivatives markets.

On 12 June 2006, Callable Bull/Bear Contracts (CBBCs) began trading on HKEx’s securities market, with seven of them at launch.

On 11 September 2006, Hong Kong Exchanges and Clearing Ltd. became a constituent stock of the HSI. In addition, the number of constitutent stocks in the HSI increased from 33 to 34, after the inclusion of CCB as the first fully tradable H-share constituent. The number of constituent stocks in the HSI further increased from 34

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to 39 when five other H-share constituents were added. Sinopec Corporation and Bank of China Limited were added on 4 December 2006, Industrial and Commercial Bank of China Limited (ICBC) and China Life Insurance Company Limited were added on 12 March 2007, while Ping An Insurance Company of China Limited was added on 4 June 2007.

Separately, HSI Services Limited announced a change in the compilation of the HSI to be phased in from September 2006 to September 2007. The full market capitalisation weighted formula will gradually move to a freefloat-adjusted market capitalisation weighted formula with a 15 per cent cap on individual stock weightings.

ICBC was the first Mainland enterprise to simultaneously list its H shares in Hong Kong and A shares on the Mainland’s Shanghai Stock Exchange on 27 October 2006. The combined offering marked the largest IPO ever in the world, raising US$19.1 billion.

With the rising significance of H shares, HSI Services Limited launched the Hang Seng China H-Financials Index (HFI) on 27 November 2006, with eight initial constituents.

With strong economic growth in Hong Kong and Mainland China, HKEx’s securit ies and derivat ives markets performed strongly and set new records in 2006. The HSI reached a high of 20001 points on 28 December 2006 while the H-shares Index soared 94 per cent to end the year at 10340 points. Trading on HKEx’s derivatives market (futures and options) also soared in 2006. A total of 42.91 million futures and options contracts were traded in 2006, a 68 per cent increase from 2005.

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HKEx’s Public Viewing Room on the first floor of One and Two Exchange Square, Central opened on 8 February 2007. The room is equipped with four workstations, which investors can use to search and view issuers’ announcements, notices and other documents on the HKEx websites, and access the website of the SFC.

HFI Futures Contract was introduced on 16 April 2007.

October 2007 was a record-setting month for Hong Kong’s securities market. The total market capitalisation, which exceeded $10 trillion for the first time on 3 May 2006, reached $23.197 trillion on 30 October 2007. Turnover rose to an all-time high of $210.5 billion on 3 October 2007, and the Hang Seng Index reached a record closing high of 31638 on 30 October 2007.

A pilot scheme requiring new listing applicants to post a web proof information pack (WPIP) on the HKExnews or Growth Enterprise Market website, as applicable, prior to the issue of an initial public offering prospectus was commenced on 1 January 2008. The pilot scheme is intended to help level the playing field for institutional and retail investors in the receipt of information about a listing applicant prior to the commencement of the public offering.

The H shares of China Railway Construction Corporation Limited were listed on 13 March 2008. It was the largest initial public offering by total funds raised of the year locally.

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Mini H-shares Index Futures were introduced on 31 March 2008.

HKEx introduced the Closing Auction Session (CAS) in its securities market on 26 May 2008 and suspended the CAS with effect from 23 March 2009.

SPDR Gold Trust (stock code: 2840) was listed on the Stock Exchange on 31 July 2008. The Exchange Traded Fund provides a way to invest in gold in a transparent and well-regulated market.

Trading of Gold Futures was reintroduced on 20 October 2008.

Prices in the Hong Kong securities market dropped amid turmoil in global financial markets. The HSI fell to an intraday low of 10676.29 on 27 October 2008.

As a result of changes effective from 1 April 2009, the blackout period applicable to dealings in a listed issuer’s shares by a director of the issuer is 60 days before the publication of the issuer’s full-year results, and 30 days before the issuer’s results for half-year and other interim periods.

HKEx signed a Closer Cooperation Agreement (CCA) with the Shanghai Stock Exchange (SSE) on 21 January 2009 and a CCA with the Shenzhen Stock Exchange (SZSE) on 8 April 2009. The agreements commit HKEx to work more closely with the SSE and SZSE towards the common goals of meeting the domestic and international fund-raising needs of Chinese enterprises, and contributing to the greater development of China’s economy.

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HKEx was ranked number one globally in funds raised through IPOs in 2009 with a total $248.23 billion.

On 27 January 2010, Russia’s United Company RUSAL, one of the world’s largest aluminium companies, raised $17.4 billion through a listing at HKEx. RUSAL’s listing was followed by the Hong Kong IPOs of Canada’s SouthGobi Resources on 29 January 2010 and France’s L’Occitane International on 7 May 2010, which raised $3.06 billion and $6.11 billion respectively.

On 8 February 2010, HKEx’s derivatives market introduced Flexible Index Options to expand its block trade facility’s coverage of over-the-counter contracts.

In February 2010, HKEx announced its Next Generation Data Centre (NGDC) project in Hong Kong’s Tseung Kwan O Industrial Estate. Hosting Services, including low-latency co-location with HKEx markets, will be offered at the NGDC. HKEx aims to move the primary data centre for its securities market to the NGDC in the fourth quarter of 2012.

In July 2010, Agricultural Bank of China was listed in Shanghai and Hong Kong after raising more than US$22 billion in the world’s largest IPO.

On 13 October 2010, Mongolian Mining raised $5.8 billion and is the first company from Mongolia to list at HKEx.

On 29 October 2010, AIA’s IPO raised more than $159 billion, a new record high for a listing in Hong Kong.

Trading of HSI Dividend Point Index Futures and HSCEI Dividend Point Index Futures commenced on 1 November 2010.

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On 8 December 2010, Vale, a Brazilian metals and mining company, became the first company from the country to list in Hong Kong and the first company to list at HKEx in the form of depositary receipts.

On 10 December 2010, HKEx announced it planned to establish a clearing house by the end of 2012 for derivatives traded in Hong Kong’s over-the-counter market.

On 15 December 2010, HKEx began accepting Mainland Accounting and Auditing Standards and Mainland Audit Firms for Mainland Incorporated Companies Listed in Hong Kong.

HKEx’s securities market finished first in the world in terms of IPO funds raised for the second year in a row in 2010, when $449.5 billion was raised through 113 new listings.

Trading in HKEx’s securities market was extended on 7 March 2011, when the hours were changed to 9:30 am to 4:00 pm with a 90-minute break starting at 12 noon.

Russian President Dmitry Medvedev and his delegation visited HKEx on 17 April 2011.

The Hui Xian REIT, the first renminbi-denominated IPO launched in Hong Kong, made its debut on 29 April 2011. The listing of the Hui Xian REIT paved the way for more renminbi-denominated IPOs to Hong Kong.