Charles Li is passionate about Hong Kong’s role as a bridge for mainland Chinese investors looking to send money overseas and global investors seeking to benefit from growth in the world’s second-largest economy. He discusses the city's future in a special interview for FinanceAsia's 20th anniversary edition.
FinanceAsia How do you see Hong Kong’s future as an international financial hub in the face of China’s market reform and further opening up of its domestic capital markets?
Charles Li The mainland’s opening up of its capital markets is a one-time event that can transform the scale and nature of Hong Kong’s financial markets. While the pace of this opening cannot be certain, and will vary by asset class, we believe that being thoroughly prepared for it is critical to securing Hong Kong Exchanges & Clearing’s (HKEx) future and maintaining Hong Kong’s position as a leading international financial centre.
FA What are the next three most important things Hong Kong can do for mainland China?
Li First, Hong Kong can become China’s global wealth management centre. A few years ago, domestic wealth was mainly held in property and bank deposits, and then later in stocks and bonds. But, China lacks more diverse investment instruments, as the products available on the mainland don’t meet the needs of sophisticated investors who are seeking international asset diversification. As China’s capital controls are set to remain for the foreseeable future, we aim to strengthen Shanghai-Hong Kong Stock Connect and launch Shenzhen Connect so mainland investors can use these secure, reliable channels to invest abroad in a familiar market environment. We are technically prepared for the Shenzhen link and are now awaiting regulatory approval. When a start date is announced, we expect a preparatory period of three to four months will be required by the market.
Second, Hong Kong can become the top offshore risk management centre for managing onshore investment risks. Interest rate and exchange rate controls in China mean the debt and currency derivatives markets are not mature enough to meet investors’ risk management needs. This creates a natural opportunity for Hong Kong. We have seen the potential with rising volumes of our renminbi currency futures contract as a way to hedge risks from the two-way fluctuation in the exchange rate. We just launched more RMB currency futures pairs to meet rising demand and now offer US dollar, euro, Australian dollar and Japanese yen contracts.
Third, Hong Kong can become China’s global asset pricing centre. As Chinese capital goes global over the next 30 years, Chinese investors will no longer just play a creditor’s role in overseas markets. As more international equities and commodities are priced in renminbi, China will be able to master the renminbi’s exchange rate and interest rate pricing worldwide.
FA What financial sector reforms are most needed in Hong Kong?
Li It’s more a matter of further improvements to a very good system than major reforms. But, one of our concerns is Hong Kong’s position limits for exchange-traded derivatives and we have proposed a revision of the stock option position limit (SOPL) model for our derivatives market. The last review of the current SOPL model was 10 years ago. Since then there has been significant growth in Hong Kong’s securities and stock options markets and our proposal addresses the technical shortcomings of the current model.
We are also undertaking a number of initiatives to ensure the quality and reputation of the Hong Kong market as a premier listing venue. For example, we are taking a proactive stance where there are questions about listing applicants’ reasons and justification for listing. In addition, we will conduct a detailed review of our regulations in connection with listed companies, including reverse takeovers and our handling of long suspended companies and delisting.
Also, having noted that the current Growth Enterprise Market (GEM) regime has been in operation for around seven years, and taking into account the new sponsor regime which came into effect in late 2013, a review of GEM has been undertaken and we plan to consult the market by the end of this year.
FA After China’s stock markets plunged last summer and the experience of short-lived circuit breakers, is China’s system better or worse than others?
Li There is no doubt that China’s market structure is more transparent from the regulatory control perspective. Nothing on the exchange market escapes the regulatory eye. With the single identification number for each investor, regulators can see right through the system to quickly identify wrongdoing and take immediate action. On the other hand, the “see through” system only applies to on-exchange activities and has failed to reach the off-exchange market.
China also has a very different market risk management model. The system is structured so that investors’ assets are left with a central custodian, making them off-limits to broker/dealers who might otherwise use the assets to leverage them.
But, the biggest difference between China and international markets is the investor composition. About 80% of China’s market participants are unsophisticated retail investors, which has caused some back-and-forth in regulatory policies whenever the market is stressed because Chinese market regulators are shouldering huge moral responsibility for the benefit of small investors.
FA Finally, what’s your most memorable moment in your professional career during the past 20 years?
Li I have strong memories of the first London Metal Exchange (LME) dinner I attended. It was in October 2012, a few months after HKEx agreed to buy the LME. When I was invited to give a short, ad hoc speech, I began in English and finished in Putonghua because there were many Chinese in the audience. They were there because China had been an increasingly important part of the LME’s business for several years. After I spoke, the audience applauded. I was told that night was the first time they heard the Chinese language in a speech at an event of the LME in the exchange’s over 130 years’. As a Chinese person, it was one of those times you never forget. FA
Charles Xiaojia Li has been the CEO of HKEx since 2010. Before then he served as chairman of JP Morgan China and president of Merrill Lynch China
