Has the growth of Hong Kong as a listing centre been driven by a booming China?
Chow: If foreign investors want to invest in the Chinese economy they find it difficult to do so in mainland China because the currency is still not freely convertible; so they all flock to Hong Kong to invest in H shares or red chips. That's why close to 45% of the trading volume at the exchange is related to mainland Chinese companies. So we are functioning as a capital-formation centre for China.
There are 1,107 listed companies in Hong Kong. Over 540 are mainland-related. So roughly half of the listed companies in Hong Kong are related to mainland China.
On the other side, there are 117 foreign brokers operating in Hong Kong out of 490 brokers. These 117 include all of the major and mid-sized brokers in the world, and they bring in a lot of business. Thanks to this I believe investors really consider Hong Kong as one of the international financial centres. As an exchange we're ranked number nine globally in terms of market capitalization.
In terms of your goals, you are ranked nine, but obviously China is growing fast and listing more and more companies. What is your target ranking?
We don't have any target, for a simple reason: we have no control over the number of companies listing in Hong Kong. It is the investment banks that talk to the potential issuers. Then it is up to the companies. What we want to do is create an environment which is favourable for them to list here. There are other markets in the world where Chinese companies could IPO, but the secondary market liquidity may not be that good.
We also want to make sure our rules and regulations meet international standards. We want to improve corporate governance standards. All of this gives us a solid foundation for attracting companies to list in Hong Kong - because such measures increases the confidence of investors, and when they have confidence they will channel more orders to us, and generate liquidity. It becomes a virtuous circle.
The other area is market infrastructure. We have to make sure our clearing and settlement and information dissemination system for both cash and derivatives markets will not see any failures. We have achieved this for the past 26 months. We are in the middle of building a complex telecommunications network linking all this information dissemination under one network - currently we have four. Thanks to economies of scale and better technology this will help us to cater to increasing trading volumes. That will take another two years to accomplish.
Plus we have to provide products that meet the needs and requirements of market intermediaries and customers. For example, to complement the cash market we have launched a number of derivatives products in the past two years - such as H share index options, and H share index futures.
What trends are you seeing in terms of the number of companies listing each year? Is it on a rising trend?
It fluctuates depending on the state of the market and whether it is a bull or a bear market. Around 420 companies have listed in the past five years. So it is roughly 80 companies per year. Last year there were 70 and in 2002 it was 117.
And this year?
In the first half of this year there were 21 listings. However, the listing committee actually approved 40 listings. Obviously 19 of those decided not to list, for example, for reasons of market sentiment. Some of the listings will spill over to July, or later.
In terms of funds raised we have been doing well. June was the single biggest month ever for capital raising in Hong Kong's history - about HK$53 billion ($6.79 billion) was raised. There were obviously three major listings: China COSCO, BoComm and Shenhua.
We don't know what the number will be for the whole year. But a few brokers have done the statistics and predict the funds raised this year will be larger than last. But it may depend on whether a major bank from China, or the Link REIT lists.
Are daily trading volumes on a rising trend?
Yes, in 2002 they averaged HK$6.7 billion; 2003 was HK$10.2 billion; and last year was HK$15.9 billion. The first half of this year was HK$16.8 billion. This is understandable because the market capitalization has increased substantially too.
The way forward for us is to capitalize on our proximity and knowledge of China. Indeed, apart from pure mainland Chinese companies I believe we will see more and more listings of Sino-Asian and Sino-European businesses that want to expand their China businesses. It is convenient to raise money in the Hong Kong market. Many Taiwanese companies with China businesses have already done this or considered it. That is a more sensible growth policy for the exchange than trying to attract companies from Latin America to list in Hong Kong.
Let us say a hypothetical Chinese company is looking at listing. On the A share market it gets a PE ratio of 30 and on the Hong Kong market it gets 12. Why would it choose to list in Hong Kong?
There are a few reasons. The first is your business might require foreign currency funding. If your business is entirely domestic, there is more incentive to do an A share listing. Second, is the ease of raising the capital. Hong Kong provides a good platform for the raising of funds. And if they want additional funding further down the line, Hong Kong can help raise additional funds through secondary offerings - just look at the experience of China Mobile. The third reason may be that they want to increase their profile internationally and start businesses outside China, and subject themselves to international standards of corporate governance and disclosure, as well as international accounting standards.
Another final reason is that it may be quicker to list here. Hong Kong has a well established process for getting listed. It is a very transparent process and there is a degree of certainty. If everything is presented properly and complies with the rules, there is no way the listing committee can reject the company's listing application. So one of the beauties of the listing regime in Hong Kong is the sense of certainty on both time and cost. That is a major attraction.
How many applications can the listing committee deal with per year?
It fluctuates. In 2002 there were 117 new listings which is a record. But obviously there were more than 117 applications. However, that is not the capacity. We have two teams that work on listing applications, and we could always add more people if the need was there. We already have over 130 staff in the listing division. The message we want to send to the underwriters and sponsors is that if the prospectus is very well prepared, it will take less time for all the parties involved in the listing - because the listing division will ask fewer questions, the SFC will ask fewer questions, the listing committee will ask fewer questions. This, in turn, puts less pressure on the potential issuers, their underwriters and their auditors.
Has Hong Kong benefited as a listing centre because the A share market has done so badly in the last two or three years?
We do not compare the HKEX with the A share market or London or New York or Singapore. Every market is unique. We just want to create a market that is conducive to attracting issuers and investors. We don't say, 'This market is no good currently, let's take business from them'. At the end of the day, we are not the one that markets. It is up to the investment banks. They are the ones who bring the companies to market.
We do conduct, with our business development department, roadshows. But in these roadshows we just talk about rules and regulations and the market environment. We don't approach individual companies, and tell them they should seek a listing in Hong Kong. At the end of the day, that is the job of the 60 investment banks operating out of Hong Kong who go out and speak to companies in Shanghai, Qingdao or wherever.
Do you think it would be better to have a single unified regulator in Hong Kong, rather than splitting the role between HKEX and the SFC?
You can't, because if you put everything under statutory regulation [which is what the SFC has to operate under] it would just kill flexibility. The market changes quickly and you have to react quickly. That means you need market regulations that can be adapted to a changing environment. That is the beauty of self-regulation. Statutory regulation has the advantage that it brings strong enforcement. I believe there needs to be a balance between statutory regulation and self-regulation.
Hong Kong prides itself on having good governance and regulation. Is it an issue for Hong Kong that around half the companies are now in China and it is difficult to actually regulate them?
Sure, and that's why since the listing of the first H share company we signed a MOU with the CSRC, the SFC and the two major Chinese exchanges. We meet once a quarter to look at regulations and measures. We also include in some of the articles of association mandatory provisions, about what companies have to do, knowing that company law in China is different. The process has been going quite smoothly, although there is always room for improvement. We believe the direction is right.
