HKEx opens Beijing office

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Last updated at: (Beijing Time) Tuesday, November 18, 2003

HKEx opens Beijing office

Hong Kong Exchange and Clearing Limited (HKEx) opened its representative office in Beijing Monday afternoon. The first branch of its type established by HKEx on the mainland, the office is expected to improve links between Hong Kong stock markets and mainland supervision bodies, and facilitate communication between the HKEx and mainland enterprises wanting to list.

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HKEx opens Beijing office

The securities authorities of the Chinese mainland and the Hong Kong Special Administrative Region will work closely together to encourage more mainland enterprises to raise funds in the Hong Kong capital market, officials from both sides said Monday.

Hong Kong will amend the regulatory system and expand the baseline so that more mainland enterprises can list H shares, Andrew L T Sheng, chairman of the Securities and Futures Commission (SFC) of Hong Kong, told a forum in Beijing yesterday.

He was echoed by Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), who said that CSRC would also enhance communication and discussion with Hong Kong's securities regulators to provide a more favourable environment for the overseas listing of mainland firms.

Co-operation between the two stock markets should reach a higher and broader level, Shang said.

HKEx opens office in Beijing

Sponsored by the Hong Kong Exchanges and Clearing Ltd (HKEx), the forum was to review the fund-raising activities of mainland firms in the Hong Kong stock market, the second biggest in Asia, over the past decade.

HKEx also opened its representative office in Beijing Monday afternoon, and State Councilor Tang Jiaxuan attended the opening ceremony.

The opening of the office will enable HKEx to provide better information services to mainland companies and help them get a better understanding of the Hong Kong market, said Charles Y. K. Lee, chairman of HKEx.

It is also part of the efforts made by Hong Kong to facilitate the listing of more mainland companies and shorten the time of such preparations, he said.

H shares are mainland-registered companies listed in Hong Kong. Since the creation of the first H share, Tsingtao Beer, in June 1993, Hong Kong had embraced 82 H shares by the end of September, 2003, which accounted for 8 per cent of the overall number of listed companies in Hong Kong, HKEx sources said.

These H-share companies altogether raised US$20 billion from the Hong Kong market. Their market capitalization took up 5 per cent of the market's total and turnover at 17 percent.

When Hong Kong helped these mainland companies get more foreign capital, it also pushed them to upgrade management and accounting standards and increase transparency, said Lee.

Meanwhile, for international investors, the platform also got them access to the mainland companies. Such business opportunities have attracted a large group of investment bankers, analysts and fund managers to Hong Kong, said Lee.

With the expected implementation of the Closer Economic Partnership Arrangement next year, which will facilitate wider economic co-operation between Hong Kong and the mainland, the two economies will further integrate, said Henry Tang, financial secretary of the government of the Hong Kong Special Administrative Region.

It also gives chance for the Hong Kong stock market and the Beijing office of HKEx a new start, he said.

Meanwhile, for the mainland, such co-operation will also promote its economic reform. Many State-owned enterprises (SOEs) are undergoing restructuring and trying to adopt the shareholding structure. The sound legal framework and investment environment in Hong Kong made it an ideal place for mainland companies to learn and catch up, said Shang Fulin.

Even after they get listed overseas, mainland companies are still to enhance corporate governance and efficiency and learn to keep good investor relation.

Experts also noted other problems that should be tackled. The large ratio of State holdings in many listed companies, for example, should be changed gradually.

Overseas listing, like H share, is not the ultimate target of the SOE reform, said Xu Xiaonian, managing director of China International Capital Corporation Ltd, a joint venture investment bank in China.

HK Securities profile

Hong Kong has the second largest securities market in Asia after Tokyo. Its efficiency and risk management systems are among the best in the world.

Hong Kong has one of the world's most liberal, active and liquid securities markets. There is neither control over capital movements nor capital gains or dividend income tax.

Being the most liquid overseas market for Mainland enterprises, Hong Kong's capital market will play a key role in funding China's state-owned enterprises reform and private enterprises' expansion, as well as its massive infrastructure development program.

Range of Services

Hong Kong has the second largest securities market in Asia after Tokyo. There were 824 listed companies as of June 2003, with a total market capitalisation of HK$ 3,907 billion (US$ 501 billion).

Hong Kong's securities market is also among the world's most liquid. Total turnover for the first six months of 2003 amounted to HK$ 842 billion (US$ 108 billion), equivalent to an average daily turnover of HK$ 7 billion (US$ 892 million).

Hong Kong's securities market is the second most active in Asia in terms of the amount of capital raised. In 2002, companies raised HK$ 110 billion (US$ 14 billion) from the main board of Hong Kong's stock market.

The launch of the Growth Enterprise Market (GEM) in November 1999 for smaller and high growth companies provided impetus for fund raising activities. As of June 2003, 175 companies were listed on the GEM. A total of HK$ 970 million (US$ 124 million) were raised in the first six months of 2003.

Service Providers

Trading activities of the securities industry are provided by investment banks, commercial banks, finance companies and securities brokerage companies.

Investment banks are the principal underwriters for initial public offerings in the primary market. Hong Kong's highly liberal and liquid securities market has attracted many international investment banks and securities house to build their presence here.

In the secondary market, local retail customers are served mainly by local brokers and banks whereas institutional buyers are principally being served by the international brokers and investment banks.

At March 2003, the securities industry as a whole employed 13,409 people.

Exports

Hong Kong's securities market has been increasingly internationalised. There has been a continued rise in the participation of international investors in the market. Many of the initial public offerings through the Stock Exchange are also made global. The majority of these issuers are supranational bodies, whose issues are almost invariably accompanied by global fund raising.

Being the most liquid overseas market for Mainland enterprises, Hong Kong is an important centre for raising capital for the Chinese Mainland. As of June 2003, among the 81 Mainland enterprises that had listed in overseas stock markets, 80 of them have listed in Hong Kong (they are commonly known as H-shares), raising an accumulated total of HK$ 153 billion (US$ 20 billion).

The listing of overseas incorporated companies, including those from the Mainland, benefits not only the securities industry but also other service industries, such as accounting and legal, associated with the initial public offering and subsequent compliance requirements.

Industry Development and Market Outlook

Latest Development

The Hong Kong Exchanges has formed alliance with London Stock Exchange to introduce a cross-trading programme.The minimum brokerage commission was removed on 1 April 2003.

China's World Trade Organisation (WTO) accession

Foreign securities firms can establish joint ventures (with foreign ownership less than 1/3) to engage (without Chinese intermediary) in underwriting A-shares, and in underwriting and trading B- and H-shares, as well as government and corporate debt.

Moreover, as greater foreign ownership is allowed in telecommunications, banking, insurance and other sectors, more Mainland firms will seek a listing in Hong Kong to tap overseas funds. Restructuring among China's enterprises (mergers and acquisitions) should increase in preparation for intensified foreign competition. Restructured Mainland companies will rely more on equity finance for expansion as part of the regional trend, bringing more business to Hong Kong.

Closer Economic Partnership Arrangement between Hong Kong and the Mainland (CEPA)

In addition to the Mainland's WTO liberalisation, Hong Kong's securities sector and professionals will benefit from the recently signed CEPA agreement with the Mainland. Under CEPA, Hong Kong Exchanges and Clearing Limited is permitted to set up a representative office in Beijing. Hong Kong professionals are permitted to apply to practise in the Mainland according to relevant procedures. Moreover, Hong Kong will gain from "Article 13 - Financial Cooperation" under CEPA, which encourages more Mainland companies to seek listing in Hong Kong. The Article states that "The Mainland will, following the principles of observing market discipline and enhancing regulatory efficiency, support eligible Mainland insurance companies and other companies including private enterprises, in listing in Hong Kong."

While Hong Kong is already the most liquid overseas market for Mainland enterprises, Hong Kong Exchange setting up a representative office in Beijing will further facilitate Mainland enterprises' listing in Hong Kong. CEPA not only paves the way for Hong Kong securities professionals to practice in the Mainland, but also help them to enrich their Mainland client network and lay the groundwork for helping Mainland clients listing in Hong Kong.

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