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Following is the keynote speech, entitled "From Challenges to Strengths: A Policymaker's Lens on Hong Kong's Securities Market", by the Permanent Secretary for Financial Services and the Treasury (Financial Services), Miss Au King-chi, at the Chamber of Hong Kong Listed Companies 12th Anniversary Celebration and 2014 Hong Kong Corporate Governance Excellence Awards Gala Dinner today (December 9):
Patrick (Chairman Mr Patrick Sun), distinguished guests, ladies and gentlemen,
Good evening.
It's a great pleasure to be with you this gala evening. An evening in which there is much to be thankful for.
First, my congratulations to the recipients of the 2014 Hong Kong Corporate Governance Excellence Awards. It is a significant achievement for each and every one of you. No doubt, the companies fortunate enough to have you will be redoubling their efforts to keep you challenged - and cheery - in the coming year.
Personally, I'm grateful for this opportunity to be with so many good friends. Yes, and old friends, too, some of whom I've known for more than a decade - or two, or three. A long time, in any case. When it comes to time, I like cartoonist Bil Keane's take: "Yesterday's the past, tomorrow's the future, but today is a gift. That's why it's called the present." Tonight, here with all of you, this is my present.
On the eve of my retirement from the civil service, there's no better occasion than this one to reminisce a bit, to consider how the securities and futures markets in Hong Kong have grown, along with us, over these past three decades.
Numbers often tell the story. So, to begin with, let me offer a few of those. Equity market capitalisation at the end of 1987 was $420 billion. This year, that number is $25 trillion, up some 60 times. Over the same period, the number of listed companies rose from 276 to more than 1,700 today. Last year, we raised $131 billion through initial public offerings, making Hong Kong second globally, just behind the United States.
Changes emanating from 1987
But more than the numbers have changed since 1987. Our securities market has gone through an equally dramatic qualitative transformation, overcoming challenges one after the other. As I see it, some notable changes have emerged in our listing platform, the companies and investors it serves, and the positioning and landscape of our stock market. That's apart from the corresponding regulatory developments. Many of those were created in response to crises we had seen, struggled with and survived - all the stronger for them.
The year 1987 was unforgettable. Of course, some of us can be forgiven for not wanting to remember it. But the lessons we learned from that critical year are still with us today. For me, the memory of the Black Monday is especially vivid. For good reason. It was shortly after Black Monday that I joined a team dedicated to serving the Securities Review Committee.
On Black Monday, 19 October, 1987, the Hong Kong stock market fell by about 11 per cent on a turnover of almost $4.2 trillion. The stock market and the stock index futures then closed for the rest of the week. Massive defaults by futures brokers followed. A week later, when the market reopened, another one-third of it had evaporated.
Global declines, starting from Wall Street, bore part of the blame. But the crash had exposed some substantial weaknesses in our stock market. The Securities Review Committee, chaired by Mr Ian Hay Davison, with yours truly as an assistant secretary, was charged with presenting a full diagnosis. The subsequent report led to the birth of the Securities and Futures Commission (SFC), a statutory body completely outside the Administration, to oversee the stock and futures exchanges.
Looking back, if the 1987 crash had been for some a nightmarish experience, a gleam of positivity illuminating from the episode would be how the lesson had been transformed into a dose of antibiotics for the market, injected through the three-tier regulatory regime for the Exchange, together with other subsequent measures at various levels of the market. Thus armed, we were ready for the opportunities of the '90s and towards the 21st century.
A listing platform facing the public
Let me first underline the changing role of our exchanges and clearing houses in our securities and futures market. To paraphrase literary giant Samuel Johnson, catastrophic loss concentrates the mind wonderfully. And so it was in the aftermath of the 1987 crash. People soon realised that the exchanges should be more than a private club, that they should cater to the benefits of all players: big and small, investors and issuers, local and international.
A more nuanced regulatory framework, with sufficient checks and balances, and space for fine-tuning, was clearly needed. That's why the SFC was empowered to regulate the exchanges. And they were also overhauled, with codified listing rules, enhanced standards and independence for members and, later, participants - not only limited to local brokers, but also to a circle expanding outward with the entrance of global players in the '90s.
The Asian financial crisis came along nearly 10 years after Black Monday. And it dealt another heavy blow to the economy. The domino started with the massive speculative attack on the Thai baht, and soon spread to Hong Kong dollars. Although we eventually fended off the speculators, the fight took its toll. Like Black Monday, however, it also made us economically healthier. The de-mutualisation and merger of our exchanges and clearing houses in 1999 were trailblazing. They consolidated the unification of the four exchanges back in the '80s. They also took our securities and futures markets to the next level, essential to competing successfully in an increasingly globalised environment.
Today's Hong Kong Exchanges and Clearing Limited (HKEx) is motivated by a consummate commitment to efficiency and competitiveness. That the HKEx is itself listed on the stock exchange helps it grasp opportunities to raise funds for companies. More important, the revamped structure helps the HKEx respond more effectively to public interest. The creation of the HKEx and the subsequent moves to improve its modus operandi, introduce new products and upgrade the technology have been crucial for its sustainable development.
Among the parameters, public interest is key. Indeed, in the Securities and Futures Ordinance, we make it clear that a recognised exchange company shall "act in the interest of the public, having particular regard to the interest of the investing public". Where it conflicts with the interest of the exchange, the interest of the public shall prevail.
And the result? We have a world-class exchange and clearing infrastructure. The introduction of the Central Clearing and Settlement System, and the Automatic Order Matching and Executive System, has enabled much better risk surveillance and management. Before central clearing and settlement, substantial risks were scattered in the market. It was inefficient, too, with time lost as traders delivered and picked up share certificates. With the establishment of the two systems, market players and regulators were in a much better position to monitor market risks and investigate suspicious market misconduct.
Changing positioning of the equity market
I should add here that, when the Securities Review Committee wrote its report in 1988, it also looked to the future of the Hong Kong equity markets. This has been acutely pertinent to Hong Kong's historical development - analysing the position of the securities market within the Hong Kong economy, while trying to predict capital-flow trends, with particular reference to the handover of sovereignty in 1997.
Considering that the Committee was working without a crystal ball, without even a revealing tea leaf, it did a pretty good job, shedding light on how Hong Kong, with its international market ambitions, should brace for risks, while all the while embracing the opportunities. And the opportunities were huge. I'm talking about the promise of an international equity market rather than a local pool, and the great expansion of companies that would bring.
We wanted a free and open market for both companies and investors. This was why we also needed a robust, international-standard regulator, one to ensure that everything took place in the open sun. The regulator would, in turn, be held accountable to the Administration and the general public. That, we felt, would prevent over-regulation, a known market killer.
In short, our regional and international ambitions were planted with the overhauling of the securities market in the 1980s. The fruit was reaped not long after. The reform helped strengthen the regulatory system, transforming Hong Kong from a marketplace for local and British companies in the '80s into Mainland China's premier capital-formation centre in the '90s. And today? Today, Hong Kong is a mature and sophisticated pivot for financing, debt issuance and derivatives trading. It's also a hub for asset and wealth management, with a unique, and growing, offshore Renminbi focus.
This brings me to the next dimension of our story - the changing competition landscape of the market, as players looked beyond Hong Kong to the north and the world. Our financial future took off, of course, with Mainland China and its opening up. And that got going in 1993, with the first H-share listing of Tsingtao Brewery. The party was soon in full swing, with an influx of Mainland company listings in Hong Kong.
It was a breakthrough for both sides - for Mainland enterprises as well as our securities market. Companies came not only to tap into international capital, but to present themselves to international investors, and get the benchmarking. To get onto the listing board, Mainland enterprises needed to pass the scrutiny of international banking, accounting and legal professionals. They had to put their ownership structure, capital plans and business blueprints under the scrutiny of regulators and investors. In short, they had to undergo stringent corporate governance tests before they could access the international stage. In return, we've been blessed with a much wider listing diversity. Over the past two decades, this process has also contributed greatly to the reform of these state-owned enterprises.
Today, H-shares and other Chinese enterprises account for half of our listed issuers, nearly 60 per cent of our market capitalisation, and more than 70 per cent of our equity turnover. We now have a combination of listed companies domiciled in different locations, but with a variety of Asian perspectives: some eye the China market, some look for holistic development in the region, others simply want to get the Hong Kong "Q" mark, which is internationally recognised. Whatever their motivation, I'm glad to see the market's vigorous growth and diverse listing portfolio.
The launch, last month, of the Shanghai-Hong Kong Stock Connect will take our market to new heights and depths. Thanks to Stock Connect, investors from Hong Kong, and from around the world, can now trade in 568 Shanghai-listed shares from the Stock Exchange of Hong Kong. And they can do it directly. In return, 266 Hong Kong-listed shares are now open for Mainland investors to trade in, directly from the Shanghai Stock Exchange.
This groundbreaking initiative could not have been made possible without the merger and de-mutualisation, which made the Exchange operationally more competitive and more responsive to evolving market needs.
The linkage between the Stock Exchange of Hong Kong and its Shanghai counterpart will reinforce our role as the bridgehead for the offshore Renminbi business. The good news for Hong Kong, of course, is that the Mainland's continuing opening up of Renminbi will offer ample opportunities for our financial services sector to grow in depth and breadth.
Fair ground for all
In all these pursuits, the importance of maintaining a level playing field ties them all together. I've never figured out what game, exactly, that phrase refers to. But whatever they're playing, it's essentially about fairness for all companies, and for shareholders of public companies. Regardless of your passport and your role, everyone is subject to the same set of requirements; everyone enjoys the same unfettered access to information.
Following the 1987 crash, investors became more aware of the value of disclosure, including the timely reporting of adequate price and transaction information, to making informed decisions. Front-running by the trading floor and other insiders eventually became unacceptable.
The story that unfolded in the 1997 Asian financial crisis would be familiar to you, I believe, including the failure of CA Pacific Securities then. It exposed the inadequate supervision of intermediaries, as well as the fragilities of the market and investment. It was the catalyst for a market awakening, a realisation that another round of fixing was necessary.
Thanks to the valuable advice and sophisticated deliberation by the industry and other stakeholders, the Securities and Futures Ordinance (SFO) was passed by the Legislative Council in March 2002. The SFO has integrated the enhanced version of 10 pre-existing regulatory laws, to maintain a transparent, fair and orderly market compatible with international standards.
As Deputy Secretary in the then Financial Services Branch, I was fortunate to take charge of the project to modernise our securities laws. Looking back, I feel our timing was right. Pushing ahead with this essential reform helped take our markets to the next level in the millennium.
I am grateful to our market players, small and large, for embracing the changes in the SFO. These include, of course, the establishment of a unified licensing regime for intermediaries and a Market Misconduct Tribunal. The SFO had strengthened the various disclosure and reporting requirements, so I could visualise the compliance obligations. But all these have helped cultivate a culture of excellence in corporate governance. Thanks to you enterprises and brokers, up-and-coming SMEs and the more mature ones, all have endeavoured to create a fair market and a level playing field.
Companies, in particular listed companies, have become aware that corporate governance is about more than check-listing whether a company has, or has not, met certain standards. It's also a sense of commitment as their success is inextricably linked to Hong Kong's well-being.
I believe the efforts have paid off, as our markets today are healthy and growing, with a doubling of intermediaries, and four-fold growth in the sale of funds and other retail investment products since 2002. Not to mention the stock market's 600 per cent increase in market capitalisation and 800 per cent growth in transaction volume over the same period.
Our markets and the regulatory framework proved their resilience in preserving financial stability and prudential wealth during the 2008 financial crisis. I know that first-hand, having returned to the Financial Services and the Treasury Bureau to become its Permanent Secretary shortly after the crisis. Hong Kong survived this challenge relatively unscathed, thanks, again, to the crisis of a decade earlier, and the subsequent measures put in place to safeguard our markets.
Take, for example, the strengthened disclosure requirement for short position ratio. It was introduced in our new SFO in 2003. Following the 2008 crisis, it was adopted as a global standard by major international financial centres.
The collapse of Lehman Brothers, however, reminded us that investor protection measures must evolve with local market needs and international standards. Regulators have subsequently tightened risk disclosure and sales conduct requirements. We now enjoy a continuous disclosure culture, including requiring listed companies to make available price-sensitive information to enhance market transparency. That, I should add, is a legislative accomplishment we finally delivered in 2011, together with this Chamber, which played a key role in advising us.
Evolving for a better future
Some 27 years after Black Monday, we're working to establish a scripless securities market in Hong Kong, seeking to enhance corporate governance, as well as increase market efficiency and overall competitiveness. The Bill is now being scrutinised by the legislature, and I am heartened to see the broad support it's getting. While some may hesitate to embrace the changes that the initiative will entail, they would see its value for the market's long-term development.
As we all know, forging a consensus in the financial markets, or in our increasingly polarised community, is never easy. But generally and eventually, people will know certain overhauls are necessary for us to move forward. The key is to compromise when appropriate and instrumental for the overall well-being. The rewrite of the Companies Ordinance and the statutory codification over disclosure of price-sensitive information were some examples of how compromise could take us forward. Now, under the Companies Ordinance, independent shareholders are granted the right to block a privatisation if they could gather 10 per cent of the votes, on the spirit of "one share, one vote". And I am sure that many of you would be familiar with the director duties under the rewrite, which clarify the duty of care, skill and diligence expected of them, in such areas as the declaration of interests. There might be some more chores for you, but the benefits of the shift in corporate culture are far-reaching.
Ralph Emerson, the 19th century American philosopher, put the art of compromise succinctly: "By persisting in your path, though you forfeit the little, you gain the great." I am glad to see our stakeholders understand this, bearing in mind what is imperative to supporting the market to take stronger strides forward, and maintain their faith in the regulators. And now I maintain the same expectation for the diversified interests in our beloved community.
That said, not even the wisdom of Mr Emerson has stopped some from asking why we are working on an initiative derived from a 26-year-old Securities Review Committee report. Well, the market is never static, because the world is never static. Our regulatory system needs continuing, carefully crafted improvements to respond to changing global demands, and to nurture Hong Kong's markets for sustainable growth, both in size and diversity. On the regulatory front, we don't need to rush Hong Kong to the top, and we don't want to race it to the bottom. What we should do is to preserve our platform, and upgrade it from time to time, on par with the developments of the markets and the products, as well as the situations happening in other international financial centres.
In this regard, we are working on an auditor regulatory reform to improve the regime regulating auditors serving listed entities. We are also establishing new regulations for the insurance industry, in response to global risks exposed during the 2008 crisis. In these, and other initiatives, my colleagues in the Financial Services and the Treasury Bureau count on your continuing support.
Concluding remarks
The financial world is as dynamic, and fluid, as life itself. In many ways, that's why we're so attracted to it. But constant change creates continuing challenges. We never underestimate them. But, if we believe certain changes will do the market good, we are determined to getting through the hurdles while striving to maintain the fine balance among different interests. I feel that resilience in the face of change is inherent in the market, too. Once the first step is made, and the rules are laid, the market knows how to reach its best under the adjusted environment.
I may have sounded like the market being as perfect and invincible as some heroic incarnation. But we all know it's never the case. The market will continue to gyrate, occasionally more sharply. Incidents do happen, and as a free market there is no ground that we should attempt to stop them. What is cardinal, I believe, is that all players - policymakers, regulators, investors, and the general public - must work to keep those challenges from striking at the heart of our securities markets, or spilling over into other areas of the financial system, jeopardising our hard-earned fundamentals.
Consensus and compromise are our guiding lights when it comes to listing reform, to nurturing healthy corporate governance built on accountability and transparency. To this end, I am indebted to the Chamber for its valuable advice, staunch support, and ongoing promotion of good corporate practices.
In retrospect, it's been a continuing process of problem identification, sensible reflection and decisive rectification for the market. Making the market stronger, sounder, surer. Little by little. Evolution rather than revolution. I believe this approach has made a difference. That we - all of us here, and so many more - have made it work. Continue to make it work. I believe it's the same for Hong Kong as a whole. The considered approach gets us safely, successfully, through the moments of high, perilous peaks, and deep, distressing troughs.
It's been much the same for me throughout my 32 years in the civil service - every day a learning, growing, endlessly engaging experience. It's been a privilege to be part of this great sector, alongside my colleagues in the Government and regulatory agencies, and all of you here with me this evening. It's been an honour to have witnessed, and played a modest role in, the continuing rise of Hong Kong and its financial markets, from parochial to world beating. I feel proud to see Hong Kong, a free and pluralistic society, and its financial system have gone that far in merely several decades' time. Beyond the equity market, we have one of the world's most resilient banking system, and a robust asset management centre overseeing $16 trillion of wealth. The Renminbi business has flourished and continues to blossom. We are putting in place an independent insurance authority to cater for a mature and diversified insurance industry. After all, Hong Kong has established a solid framework to run the regulatory system and infrastructure, capable of organic growth, addressing public interests, malleable to changes, and evolving with local and global needs. While I am moving on, I am honestly grateful for the chance to learn from the markets, and all of you, as I have enjoyed almost every moment in my civil service career.
For that, and for these treasured, unforgettable years, I thank you - from the bottom of my heart.
And in this festive season, may I wish you all a joyous Christmas and a fabulous New Year!
Ends/Tuesday, December 9, 2014
Issued at HKT 21:29
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