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Following is a speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the Annual Dinner and Directors of the Year Awards 2005 Presentation today (November 17) (English only):
Herbert (Hui), Moses (Cheng), distinguished guests, ladies and gentlemen,
I am delighted to address the Hong Kong Institute of Directors Annual Dinner 2005 and to present the Directors of the Year Awards.
First, a heartfelt congratulations to all the awardees and thank you for your contributions to Hong Kong's corporate governance regime. Second, may I pay tribute to Herbert and his colleagues in the Institute for their great efforts to promote corporate governance through seminars, development programs and publications, etc. In particular, the Directors of the Year Awards has become one of the most prominent corporate governance events in Hong Kong, which accords well-deserved recognition to outstanding directors, and promotes good corporate governance practices.
Theme of speech
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This is the fourth time I have spoken at the HKIoD dinner functions. My previous three speeches were all dedicated to our efforts in enhancing our regulatory regime and corporate governance standards. This year, while I will talk about these issues again given their importance. I wish to address them from a different perspective.
The prominent trend of more and more Mainland enterprises, especially large ones, choosing Hong Kong as the place for listing has attracted much attention as well as remarks from people in many other financial markets, who are envious of Hong Kong's privileged position. Indeed, financial markets around the world, including the US, the UK, Korea and Singapore, are all eyeing the rich business opportunities in the Mainland. The recent listing of the China Construction Bank in Hong Kong, which is the world's largest IPO in the past four years according to the Asian Wall Street Journal, might be quite a disappointment to other markets who have been very eager to secure this deal. The unfounded allegation that Mainland enterprises choose to list in Hong Kong for the lower corporate governance standards not only reflects the extent of such disappointment, but also a lack of understanding about the regulatory regime in Hong Kong. I would like to take this opportunity to clear this misunderstanding by pointing out the reasons why the Hong Kong financial market has become Mainland enterprises' venue of choice for raising capital from both the issuers' and investors' perspectives.
The rise of Hong Kong as a premier capital formation centre for the Mainland
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The veteran financial intermediaries among you may still remember that since the 1990s a number of the Mainland listings in Hong Kong have been dual listings. Examples of dual listings in Hong Kong and the US include Shanghai Petrochemical listed in 1993, Jilin Chemical Industrial in 1995, Huaneng Power International in 1998, China Petroleum and Chemical and PetroChina, both listed in 2000, and China Telecom in 2002. A more recent one is China Life Insurance in 2003. Dual listings were favoured as it would enable issuers, particularly those raising a substantial amount of funds by way of IPO, to take advantage of and gain access to a larger pool of international investors and fund managers using the major overseas exchanges, notably the New York Stock Exchange.
Times have changed. In more recent years, we have witnessed a shift in listing strategy among Mainland enterprises, with Hong Kong now positioning as the first and often exclusive choice for Mainland enterprises to raise funds through the capital market. As of end-October 2005, 322 Mainland enterprises were listed on our stock exchange, accounting for 29% of the total number of listed companies in Hong Kong. By listing in Hong Kong, they have raised over US$137 billion in the past years. On the other hand, the number of HK-US dual listing has begun to decline. As you are aware, no HK-US dual listing has taken place this year. Last month, China Construction Bank opted to raise over US$8 billion in the Hong Kong capital market alone. The fact speaks for itself. The fact that these large corporations choose to list in Hong Kong shows that our stock market, with its robust regulatory regime and high corporate governance standards, must be sound enough for both the Mainland enterprises and the international investing community to cast their vote of confidence here.
Why Mainland enterprises choose Hong Kong and Hong Kong alone
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So why do Mainland enterprises choose Hong Kong and Hong Kong alone? The sceptics, the less well-informed, or the envious commentators outside of Hong Kong might argue that Hong Kong is chosen because these enterprises find it easier to meet our regulatory standards. I must dispute that fervently. Our regulatory framework is in every aspect on a par with international standards. I am sure any investment banker, lawyer and accountant who has dealt with the Hong Kong Exchanges and Clearing Limited (HKEx) and the Securities and Futures Commission (SFC) can confirm that they are as stringent as regulators in other mature capital markets.
Mainland enterprises are well aware of the high standard of requirements of our regulatory regime. But they still choose to seek listing in Hong Kong because there is a strong case for them to do so. I can think of at least six reasons to explain why Mainland enterprises choose Hong Kong as their platform for listing:
First, Hong Kong has a large and deep stock market that attracts funds from all over Asia and the rest of the world, and has abundant liquidity to support even very large listings. Located in the heart of Asia, Hong Kong is already an important asset management centre in the region. More and more global fund houses are now managing their Asian portfolios through Hong Kong, rather than the US or Europe. According to the 2004 Fund Management Activities Survey, Hong Kong's combined fund management business amounted to US$464 billion at the end of 2004. Funds sourced from overseas investors account for over 60% of the fund management business in Hong Kong. With this huge international funding in Hong Kong looking for investment opportunities in Hong Kong and the Mainland, Hong Kong is the obvious and natural choice for Mainland enterprises to seek listing and raise capital.
The trading volume in the Hong Kong market is significant. It has been a common phenomenon that the trading of securities of Mainland corporations with dual listings, often shift from the other listing locations, be it London or New York, back to Hong Kong soon after the IPOs. For instance, at end of 2004, of the 28 stocks cross-listed in Hong Kong and the US, Hong Kong's market share for the trading of these stocks constituted as much as 81%.
Hong Kong's capability in capital formation is tremendous and well-proven. In terms of the total funds raised, we ranked fourth globally in 2004 and in the first seven months of 2005. This is indeed impressive for a small city like Hong Kong. In 2004, the amount of funds raised in the stock market in Hong Kong amounted to 22% of our GDP, and 69% of Gross Domestic Savings (GDS). Take the US as an example. The funds raised was only 1% of its GDP and 8% of the GDS. These large percentage numbers for Hong Kong indicate very clearly the significant presence of foreign funds attracted to the capital raising activities in the stock market of Hong Kong.
Second, the corporations seeking listing want to be close to the listing venue, ideally in the same time zone, for obvious business, strategic and management reasons. Because of the culture we share with the Mainland, Hong Kong understands the Mainland business climate and perspective better. Our cultural affinity and proximity advantage will also facilitate more effective and efficient regulation by the regulators.
Third, a company should prefer to be listed in the financial centre where the research community of institutional investors has the expertise, local knowledge and critical mass to have an in-depth understanding of the underlying business of the company. Also Hong Kong, compared with other international financial centres, has more investors who are knowledgeable and interested in investing in the Mainland.
Fourth, many of the investment banks, law firms, accountant firms and other professional institutions have based their Asian operations in Hong Kong for a long time, and have accumulated rich experience serving as Mainland's gateway to the international business. This gives us a lot of competitive edge in doing quality due diligence and helping issuers understand our regulatory requirements.
Fifth, international recognition. Mainland enterprises look to list in Hong Kong not only for funding, but also for raising their corporate governance standards, for the associated credibility and quality mark, and recognition by international investors. The enhancement of Mainland enterprises corporate governance is greatly facilitated through the listing process.
Lastly, the sixth reason I may quote is cost effectiveness. According to the SFC, for a typical listing with the funds raised of HK$400 million, the professional fees and underwriting fees in the US double the cost in Hong Kong, amounting to around an extra HK$20 million. The difference of HK$20 million is by no means marginal.
China is one of the economic powerhouses in the world and has enjoyed an annual growth of 9.4% between 1978 and 2004. Over the past two decades, the per capita income has risen almost three-fold, to more than US$1,200. As the economic reforms continue, there will be a continuous flow of Mainland new listings. Hong Kong is well-positioned to take full advantage of these new opportunities and to play a major role in the restructuring, upgrading and growth of these companies. We take pride in the integrity, professionalism, expertise, experience and trilingual ability of our financial services community. The investment bankers, accountants, lawyers in our community possess a wealth of knowledge, understanding and experience in dealing with Mainland companies that is unrivalled by their counterparts in other markets. They have unequivocally proved their strengths in handling the due diligence, valuation and compliance work necessary to successfully undertake mega IPOs in Hong Kong.
Confidence of international investors
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The fact that so much foreign money and institutional investment is placed in the Hong Kong stock market proves the confidence of international investors in our system.
Our rules and regulations are robust, transparent and are enforced with consistency by our regulators subject to checks and balances. Our regulatory requirements are very much on a par with international standards and practices. The SFC is professional in regulating the market. Equipped with a wide range of investigative powers, the SFC spares no effort in combating market misconduct. Effective sanctions and remedies are provided in the law. The SFC has also established excellent cooperation with the Chinese Securities Regulatory Commission in carrying out its enforcement duties.
I have to stress that we have constantly been benchmarking ourselves against other major financial centres, and keeping our legal and regulatory framework under review to keep pace with the best international practices. We are continuously improving our market infrastructure. To name just a few of our initiatives:
* The Listing Rules in Hong Kong are up to international standard and are kept under review. We will introduce legislative amendments to give statutory backing to major listing requirements within the current legislative session.
* A new Code on Corporate Governance Practices took effect on January 1, 2005. The Code reflects the best current market practices and international standards.
* Financial intermediaries perform an important gate-keeping function. Hong Kong financial reporting standards issued by the Hong Kong Institute of Certified Public Accountants fully converge with the International Financial Reporting Standards. This uniform accounting platform, well understood by global investors and financial analysts, is conducive to the comparison of companies and their results in different jurisdictions and leads to greater confidence in the quality and value of our stocks. In Hong Kong, the financial reports of listed companies are required to conform with the International Financial Reporting Standards and that the accounts are audited by either Hong Kong qualified auditors or accountants having international name and reputation.
* We have introduced a Bill to the Legco for setting up the Financial Reporting Council (FRC). I hope that the Bill can be enacted as soon as possible to enable the establishment of the FRC, which will be a statutory independent body to carry out investigations into suspected irregularities concerning auditors of listed corporations, and to inquire into suspected non-compliance with financial reporting standards.
* The Listing Rules amendments which came into effect on January 1, 2005 have imposed more stringent due diligence requirements on IPO sponsors. Separately, SFC has completed public consultation on the licensing requirements on sponsors, focusing on the eligibility criteria and ongoing obligations. We look forward to an early introduction of the licensing standards in respect of sponsors.
Conclusion
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Ladies and gentlemen, I would like you to take home the following messages:
First, Hong Kong is the preferred choice of listing for Mainland enterprises because we offer a highly efficient and cost-effective platform for raising capital.
Second, Hong Kong inspires confidence of international investors. All statistics speak loud and clear - international investors are casting their vote of confidence on us by putting their money here in Hong Kong. Their confidence has been built on our sound regulatory regime, which is on a par with other major international financial centres such as the US and the UK.
Third, corporate governance is very important in maintaining investor confidence and is the foundation of our capital markets. Promoting corporate governance is high on the Government's policy agenda and central to the work of all our regulators.
Fourth, the Government fully recognises that we cannot be complacent, and thus we will continue to make every effort to further improve our regulatory regime in tandem with development in the international arena. And this has to be done through the concerted efforts of our regulators, corporations, and professional bodies including the HKIoD. We do not only set rules and standards, but also provide an environment that is conducive to the development of a compliance culture.
I would like to add here that we have been fortunate to have the HKIoD, which has long been an invaluable partner with the Government and the regulators to champion good corporate governance. I am sure I can count on the Institute's continuous support in the years to come.
Finally, may I take this opportunity to congratulate again the awardees of the Directors of the Year Awards, and wish you all an enjoyable evening. Thank you.
Ends/Thursday, November 17, 2005
Issued at HKT 20:50
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