Following is the speech (English only) by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Young Entrepreneurs' Organization Luncheon "Elements of Successful M&A in China" today (April 9):
Mr Chen, ladies and gentlemen,
I am most delighted to be invited to this forum today with some of the most innovative young entrepreneurs in town. I am sure you already had a very fruitful exchange at the various panel discussions this morning concerning the topic of "Elements of Successful M&A in China".
It is widely recognised that M&A activities have increased considerably in the Mainland over the past several years, and are now an increasingly common and important feature of China's economic landscape. According to an industry survey (Note 1), M&A activities in the Mainland surged by 50% in 2004, and the volume of such business soared at an annual rate of 70% in the past five years. The aggregate value of China M&A deals (including Hong Kong) announced in 2004 amounted to US$52 billion. From a regional perspective, the Mainland China contributed 21% by value and 32% by number to Asia as a whole in terms of M&A deals. We note many in the industry are optimistic that the upward trend in the Mainland's M&A activities would continue.
The increased pace of M&A activity in the Mainland has been fuelled by both economic reforms and robust growth. China's accession to the WTO has opened many industry sectors to foreign investment, thus permitting greater access to the Mainland's domestic market. Recognising the benefits brought by foreign investment, the Mainland authorities are increasingly welcoming M&A and overseas capital investment to facilitate foreign capital inflow and the transfer of advanced technology and management know-how from foreign investors, which would help enhance the competitiveness of Mainland enterprises. Thus, over the past few years, the Mainland authorities have issued new regulations governing foreign purchase of stakes in domestic enterprises and foreign investment in state-owned enterprises. From the perspective of foreign investors, M&A is an increasingly attractive alternative to green field investments as it offers immediate market access and is considered a highly viable method of entering the Mainland's market.
Hong Kong has been the Mainland's largest source of foreign direct investment and one of the Mainland's largest trading partners. Over the years, Hong Kong's direct investment in the Mainland has progressively diversified from manufacturing to other sectors like infrastructure, real estate, hotel and tourist-related facilities, retail and services, and has spread to many provinces and localities. In this regard, I understand that many Hong Kong companies have benefited from participating in M&A in the Mainland through acquiring stakes of Mainland enterprises, including state-owned enterprises, to take advantage of their assets for immediate production and further growth. By contributing their capital, management and technical expertise, Hong Kong companies benefit from the market entry licence, good quality assets, real estates, readily available production capacities, local sales network and customer base. Apart from increased investment opportunities, the surge in M&A activities in the Mainland has also increased the demand for Hong Kong's professional services. For instance, I note that Hong Kong accountants and lawyers are favoured by both Mainland enterprises and foreign investors in handling M&A deals in the Mainland, given their world-class services and good knowledge about Mainland culture and practices.
Capitalising on our advantages as an international financial centre, Hong Kong is well positioned to play a key role in facilitating M&A activities in the Mainland.
Transferring advanced management and corporate governance systems and practices
Firstly, Hong Kong companies are able to transfer advanced management systems and skills to the Mainland enterprises, hence contributing to more stringent internal control and enhanced corporate governance standards in the Mainland.
For instance, Hong Kong's financial institutions, which subscribe to the best international practices of accounting, auditing, disclosure and governance, are contributing to this process. Hong Kong banks have already established a strong presence in the Mainland. As at end-March 2005, a total of 16 locally incorporated Hong Kong banks have set up 56 branches and 27 representative offices in the Mainland, which is the highest among all foreign countries or economies. Furthermore, following China's accession to WTO, Hong Kong institutions have continued to acquire stakes in Mainland financial institutions including domestic banks (Note 2) and insurance company (Note 3). It was also good news that a number of international investment banks have decided to set up joint ventures with or acquire stakes in Mainland securities and fund management companies (Note 4). I am sure that their Hong Kong offices would play a key role in the management of the joint ventures.
The signing of CEPA has facilitated greater access of Hong Kong financial institutions into the Mainland market by substantially lowering asset requirements for Hong Kong banks to set up branches in the Mainland, and raising the maximum equity participation by Hong Kong insurers in a Mainland insurance company. The Mainland has also agreed to allow intermediary agencies to set up joint venture futures brokerage companies in the Mainland. With further integration of Hong Kong and the Mainland economies, the prospects for Hong Kong financial institutions to expand business in the Mainland are good in the years to come.
We strongly hope that Hong Kong's financial institutions would take advantage of the CEPA opportunities to enter the Mainland market and contribute capital, professional expertise, market and product knowledge and advanced management systems to the Mainland's financial sector.
A professional service centre
Secondly, Hong Kong can play the role of a service centre to complement the development needs in the Mainland by providing key supportive services including commercial, financial, logistics, accounting, legal and other professional services. Over the years, Hong Kong has developed a strong pool of sophisticated professional service providers, including accountants, bankers and lawyers, who are able to advise and serve prospective investors in matters arising from M&A transactions. For Mainland enterprises that are seeking to increase their attractiveness to international investors, Hong Kong's professional service providers would be able to advise them on asset restructuring, capital raising, process re-engineering and also corporate image building. In addition, many Hong Kong companies have capitalised on their business networks in both overseas countries and the Mainland to act as an intermediary to facilitate international investors' investment in Mainland enterprises. We believe that Hong Kong's service providers do have a competitive edge over their foreign counterparts given their world-class services, knowledge on Mainland laws and practices, and large network of contacts built-up in the Mainland through long-standing business relationships.
Hong Kong as a platform for attracting foreign investment and raising capital
Thirdly, Hong Kong has been the most preferred market by many Mainland enterprises for raising capital, including those which need to raise funds for financing M&A. Hong Kong has long been the Mainland's most important source of foreign capital, channelling into the Mainland funds from both Hong Kong and overseas. According to Mainland's statistics, the cumulative value of Hong Kong's realised direct investment in the Mainland reached US$242 billion at end 2004, accounting for 43% of the total foreign direct investment in the Mainland.
The stock market in Hong Kong provides a useful channel for these enterprises to raise capital from investors in Hong Kong and overseas. In Hong Kong, Mainland enterprises have raised over $900 billion since the introduction of H-shares in 1993. As at end February 2005, 307 Mainland enterprises were listed here and representing over a quarter of the total number of listed companies in Hong Kong. With total market capitalisation of about HK$2,100 billion, these enterprises accounted for about 30% of our total stock market capitalisation. Trading in their shares last year constituted half of our total market turnover. In addition, the vast majority of Mainland enterprises listed outside the Mainland is quoted on our stock exchange. Of those listed in Hong Kong, only a minority is also listed in other overseas markets, and more than 70% of their trading is conducted in Hong Kong. This demonstrates Hong Kong's important role as the premier international capital formation centre for the Mainland. We will continue to enhance the quality of our market in order to attract more high-quality Mainland enterprises to list in Hong Kong.
In addition, Hong Kong can also be a major debt financing centre for Mainland enterprises, as they can raise funds in Hong Kong by issuing bonds and borrowing from Hong Kong banks. In particular, with the favourable debt financing infrastructure in Hong Kong, we are hoping that more Mainland companies would issue bonds here.
Looking ahead - upholding Hong Kong's status as an IFC
To enable Hong Kong to further develop its role as the premier capital formation centre for China and to contribute more to the M&A activities in the Mainland, we must continue to enhance our competitiveness as an international financial centre. In this connection, we have been taking forward a number of measures and proposals to enhance the quality of the market and to make our market more attractive to investors and fundraisers.
Enhancing Market Quality
To upgrade our market quality and to enhance our corporate governance regime, we will introduce legislative amendments into the Legislative Council in the current legislative session to give statutory backing to major listing requirements, including financial reporting and other periodic disclosure, disclosure of price-sensitive information and shareholders' approval for notifiable transactions. The law will be amended to the effect that breaches of statutory listing requirements would become a new type of market misconduct which is subject to a range of civil and criminal sanctions. Besides, we will also propose legislative amendments to establish the Financial Reporting Council, which aims to enhance the oversight of the auditors of listed corporations and to check the compliance of financial reports with legal and accounting requirements by listed corporations. The Hong Kong Exchanges and Clearing Limited also introduced a new Code on Corporate Governance Practices in January this year to implement a number of corporate governance improvement measures in the three areas of directors' and board practices, protection of shareholders' rights and corporate reporting and disclosures.
In respect of the banking sector, I just introduced a bill into the Legislative Council earlier this week to amend the Banking Ordinance with a view to establishing a legislative framework in Hong Kong for the implementation of the new capital adequacy standards, commonly known as "Basel II". Implementation of the new standards will further strengthen the stability of our banking sector through enhanced risk management capability, and will also put our banks in an advantageous position in the face of the further liberalisation of the Mainland's financial markets in future. In particular, we are aware that all large Mainland banks with extensive overseas operations have been asked to start developing an internal risk management system in line with Basel II. In this regard, Hong Kong's experience would serve as useful reference for banks in the Mainland. Separately, we are continuing our efforts to prepare for the implementation of a deposit protection scheme in Hong Kong in the second half of 2006.
Attracting investors and fundraisers
Apart from enhancing the quality of our market, we will continue to promote the development of the capital market to create more opportunities for investors and fund-raisers. For example, we are making an all-out effort to become the preferred bond market in Asia. In recent years the Government has done a lot to promote the bond market, including providing the necessary infrastructure, simplifying the issuance process, offering tax incentives, encouraging public corporations to take the lead in launching debt issuance programmes, and stepping up investor education on bond investment. The successful launch of the two bond programmes by the Government last year has not only raised the awareness and interest of the public in bonds and increased their investment choices, it has also proved that Hong Kong possesses the expertise and infrastructure for large scale bond issuance. A well developed bond market in Hong Kong would provide an attractive investment channel to those Mainland funds which hope to pursue stable returns.
To further enhance Hong Kong's position as an international asset management centre, the Financial Secretary announced in the Budget his decision to abolish the Estate Duty with a view to retaining wealth in Hong Kong and attracting foreign capital. We are also working on the proposal to exempt offshore funds from profits tax. We aim to introduce into the Legislative Council the necessary legislative amendments within the current legislative session.
The global market, including the Mainland market, is changing rapidly. To take the greatest advantage of the transforming market environment, it is of utmost importance that we reinforce our strengths and competitiveness constantly in the light of the rapid developments and rising competition, and to identify areas of new opportunities. The increasingly liberalised market in the Mainland and the rising trend in M&A activities have presented unprecedented opportunities for Hong Kong companies and our service providers. The Government will spare no effort in fostering a conducive environment for our entrepreneurs to capture these golden opportunities and to contribute to the Mainland's development process. I am sure entrepreneurs like you would not miss any opportunities to further develop your business on the basis of the strong economic growth in China.
1. Source: Statistics taken from an industry journal, M&A Asia, which was quoted by press release issued by PricewaterhouseCoopers on February 3, 2005.
2. Hang Seng Bank has acquired 15.98% stakes in the Industrial Bank in April 2004, while the HSBC has acquired 19.9% stakes in the Bank of Communication in August 2004. Standard Chartered Bank also acquired 19.9% stakes in the Tianjin Bohai Commercial Bank in December 2004.
3. HSBC acquired 10% stakes in Ping An Insurance in 2002.
4. Goldman Sach's has recently decided to establish joint venture with Gao Hua Securities. Merrill Lynch also announced that it will pay US$32 million to establish a joint venture with Huaan Securities. UBS has announced that it will acquire 49% of China Dragon Fund Management.
Ends/Saturday, April 9, 2005