Hong Kongs Financial Markets: Positioning in the Asia Pacific region - - PowerPoint PPT Presentation

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Hong Kong’s Financial Markets: Positioning in the Asia Pacific region

• Mr. Andrew Sheng

Chairman Securities and Futures Commission 29 October 2004

HK Economic and Trade Office & HK Association in New York Luncheon

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♦ Stock Market: Market cap at US$741.3 bn as of end Aug 2004 – the largest stock market in Asia-ex-Japan ♦ Derivatives Market: 14.5 mn contracts traded in 2003 (11 mn contracts in 2002) ♦ For the 12 months ending Sep 2003,

• Institutional investors accounted for 58% of the

turnover

• Overseas investors accounted for 39% of the

turnover ♦ 1,077 companies listed on HKEx at end Aug 2004 ♦ Major fund raising centre for Mainland enterprises ♦ Securities market supported by highest concentration

• f international legal and accounting firms in Asia

Largest Market in Asia-ex-Japan

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Hong Kong – the Largest Market in Asia-ex-Japan (US$ bn)

100 200 300 400 500 600 700 800

China Hong Kong Australia Taiwan Korea Singapore

end 1988 end 2000 end 2001 end 2002 end 2003 end Aug 2004

4.3x 10.0x N/A 7.9x 3.1x 3.4x

Remark: x = increase from end 1988 to end Aug 2004 Sources : WFE and IFC

4 Industrials 15.9% Hotels 0.7% Utilities 6.9% Properties 12.1% Finance 36.8% Consolidated enterprises 27.5% Miscellaneous 0.2% Industrials 7.3% Hotels 2.0% Properties 31.0% Utilities 10.3% Finance 23.2% Consolidated enterprises 25.9% Miscellaneous 0.3%

Market Capitalisation by Sector (%) (Main Board)

End 1996

(Total market cap: HK$3,476.0 bn)

End Aug 2004

(Total market cap: HK$5,720.4 bn)

Source : HKEx

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Capitalization and Turnover of Major Markets

(end Aug 2004, US$ bn)

Market change over Market change over P/E Cap Aug 03 Turnover Aug 03 ratio

Australia 597 26.4% 466 42.1% 23 China 472

• 3.2%

499 45.0% 25 Hong Kong 741 25.1% 425 104.3% 18 India 246 37.9% 272 133.5% n.a. Indonesia 55 31.4% 23 112.6% 7 Japan 3,240 26.6% 3,206 97.7% 17 Korea 320 19.4% 496 11.5% 12 Malaysia 172 12.8% 68 101.9% 15 Philippines 25 19.5% 4 72.2% 14 Singapore 191 47.1% 116 79.2% 18 Taiwan 366 10.7% 737 31.8% 15 Thailand 97 36.0% 146 202.8% 9 Germany 961 14.4% 1,540 34.3% 22 UK 2,407 19.9% 4,782 38.4% 15 US (NYSE) 11,700 14.4% 11,017 17.0% 18 US (Nasdaq) 2,647

• 0.9%

8,445 33.3% 46

Remarks: Turnover - for the 12 months ending Aug 2004, P/E ratio - end Aug 2004 P/E ratio for China is the weighted average of A and B shares markets Data for India includes only those from National Stock Exchange of India Limited Sources: WFE and websites of various exchanges

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HSI and Turnover Rebounded

2000 4000 6000 8000 10000 12000 14000 16000 18000

Jun-97 Nov-97 Apr-98 Sep-98 Feb-99 Jul-99 Dec-99 May-00 Oct-00 Mar-01 Aug-01 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04

Hang Seng Index 100 200 300 400 500 600 700 Market Turnover (HK$ bn)

Market Turnover Hang Seng Index

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498 575 667 500 390 791 590 669 605 614 476 401 560 422 328 699 878 625 557 526 436 415 360 308 447 308 458 539 425 326 323 288 243 197 210 656 502 476 809 813 644 506 481 422 384 302 256 344 292 426 617 473

500 1,000 1,500 2,000 2,500 3,000 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Average Daily Turnover (US$ mn) HSI H-shares Red chips Others

Turnover by Stock Type

♦ Compared to Aug 2003, turnover of stock types in Aug 2004 increased/decreased

• HSI: 12.4%
• H-shares: +2.0%
• Red chips: -27.8%
• Others: -18.8%

Remark: Where a company belongs to both HSI and red chips, it is classified into red chips Source: HKEx

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Mainland Share of Hong Kong Market Rising

Source: HKEx

1996 1997 1998 1999 2000 2001 2002 2003 2004 Aug Total (Main Board + GEM) 583 658 680 708 790 867 978 1,037 1,077 Mainland enterprises 69 98 104 112 119 127 146 164 181

• H-shares

23 39 41 44 50 58 74 92 105

• Red chips

46 59 63 68 69 69 72 72 76 Total (Main Board + GEM) 3,476.00 3,202.30 2,661.70 4,734.70 4,862.50 3,946.30 3,611.30 5,547.80 5,782.00 Mainland enterprises 294.8 521.6 368.5 1,000.10 1,290.50 1,011.60 938.8 1,606.00 1,554.85

• H-shares

31.5 48.6 33.5 41.9 86.1 101.7 131.6 408.2 401.335

• Red chips

263.3 473 335 958.2 1,204.40 909.9 807.2 1,197.80 1,153.52 Total (Main Board + GEM) 1,412.20 3,789.00 1,701.00 1,919.50 3,131.80 1,989.50 1,643.10 2,583.80 3,785.57 Mainland enterprises 160.3 1341.5 442.9 458.3 846.9 749.2 453.3 1,000.40 1,595.30

• H-shares

24.9 297.8 73.5 102.8 171.2 251.4 143.6 506.1 933.3

• Red chips

135.4 1,043.70 369.4 355.5 675.7 497.8 309.7 494.3 662.0 Number of Listed Companies (period end) Market Capitalisation (period end, HK$ bn) Market Turnover (12 months ending, HK$ bn)

♦ By market cap, Mainland enterprises were 27% of the total ♦ By turnover, Mainland enterprises were 42% of the total

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Index and P/E of H-share index still below historical high levels

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

01/94 07/94 01/95 07/95 01/96 07/96 01/97 07/97 01/98 07/98 01/99 07/99 01/00 07/00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04

5 10 15 20 25 30 35 40 H-share Index P/E Ratio

Remark: P/E ratio prior to Aug 1994 was not available. Sources: CEIC, HSI Services, Bloomberg

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Stock Market Performance (since end Jun 1997)

Stock Market Indices % change end Jun 97 end Aug 04 in local currency in USD Australia 2,726 3,563 30.7 22.1 Hong Kong 15,197 12,850

• 15.4
• 16.0

India 1,192 1,632 36.8 5.7 Indonesia 725 755 4.2

• 73.0

Japan 20,605 11,082

• 46.2
• 43.6

Korea 745 804 7.8

• 17.2

Malaysia 1,077 828

• 23.1
• 48.9

Philippines 2,809 1,580

• 43.8
• 73.6

Shanghai A 1,307 1,408 7.8 7.9 Shenzhen A 449 348

• 22.7
• 18.4

Singapore 1,921 1,918

• 0.2
• 18.0

Taiwan 9,030 5,766

• 36.2
• 51.1

Thailand 527 625 18.5

• 27.8

Germany 3,786 3,785 0.0

• 4.0

UK 4,605 4,459

• 3.2

4.7 US (Dow Jones) 7,673 10,174 32.632.2 (Nasdaq) 1,442 1,838 27.5 30.9

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Tremendous Growth in Mainland Stock Markets

(1370) (1224) (323) (53) (183) (851) (745) (530) (291) (949) (14) (1086) (10) (1160) (1287)

100 200 300 400 500 600 700 800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Aug- 04

Market capitalisation (US$ bn) 100 200 300 400 500 600 700 800 Market turnover (US$ bn)

• No. of listed companies

Market turnover Market capitalisation ( )

* Turnover - for the 12 months ending Aug 2004 Sources: Shanghai Stock Exchange & Shenzhen Stock Exchange

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Potential of Chinese Securities Market

♦ Shanghai & Shenzhen – 1,370 listed companies at end Aug 2004 ♦ 4th largest in Asia, with a market cap of US$471.6 bn at end Aug 2004, 33% of GDP ♦ High domestic savings can be used by securities markets to deleverage Chinese enterprises, improve corporate governance, accelerate competitiveness ♦ China’s entry to WTO:

• deepen reforms in the securities markets
• greater access to the Chinese market

♦ Great potential for securities market development ♦ Olympic Games 2008 in Beijing ♦ World Expo 2010 in Shanghai

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Hong Kong As a Major Fund Raising Centre for the Mainland

♦ 181 Mainland companies as of end Aug 2004, constituting 27% to the total market cap ♦ In 2003, Mainland enterprises raised US$6.8 bn directly and indirectly through HK ♦ In 2002, they raised US$9.1 bn through HK, about the same as the total funds raised from the A markets of Shanghai & Shenzhen ♦ Opportunities for Hong Kong

• Listing of China’s Global Bonds
• Growth Enterprise Market (GEM)
• IPO of Chinese enterprises accounts for 50%+ of

HK’s total IPO

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5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 Germany^ Hong Kong Euronext* Switzerland Italy 2001 2002 2003

Hong Kong’s derivative warrants market was the 2nd active in the world in 2003

Remarks: * Figures for Euronext are the aggregate figures from the exchanges of Amsterdam, Brussels, Lisbon and Paris. ^ Figures for Germany are the aggregate figures from all German Exchanges (Deustche Borse). Source: HKEx, Exchange, April 2004, pp. 40-58 WFE Monthly Statistics, December 2003

Turnover of Derivative Warrants by Major Markets (US$ mn)

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Tracker Fund and Exchange- Traded Funds

♦ TraHK: Launched in Nov 1999 ♦ Objective: to sell stocks of US$15 bn that the Government purchased in Aug 1998 ♦ Total sale proceeds > US$17 bn ♦ Largest Index Fund in the world at launch ♦ 5 other ETFs launched:

• iShares MSCI South Korea Index Fund (2 May 2001)
• iShares MSCI Taiwan Index Fund (2 May 2001)
• iShares MSCI China Tracker (23 Nov 2001)
• H-share Index ETF (10 Dec 2003)
• Hang Seng Index ETF (21 Sep 2004)

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Hong Kong Derivatives Markets

♦ Types of derivative products

• 4 types of Futures
• 2 types of Options

♦ 4 types of Futures include :

• Index Futures (HSI Futures, Mini HSI Futures, H-shares

Index Futures, MSCI China Free Index Futures, Dow Jones Industrial Average Futures) – 8,105,877 contracts in 2003

• Stock Futures – 18,654 contracts in 2003
• HIBOR Futures (1-Month HIBOR and 3-Month HIBOR) –

48,109 contracts in 2003

• 3-Year Exchange Fund Note Futures – 2,012 contracts in

2003 ♦ 2 types of Options include :

• Index Options (HSI Options, Mini HSI Options) – 2,150,923

contracts in 2003

• Stock Options – 4,220,638 contracts in 2003

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Growth in the Hong Kong Derivatives Markets

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1-8

Total Turnover (Contracts, '000) Source: HKEx

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Distribution of Derivatives Trading by Investor Type (%)

Registered traders/ market makers 24% Local retail investors 28% Local institutional investors 10% Overseas institutional investors 23% Overseas retail investors 2% Proprietary trading 13%

Source: HKEx DTMS 2002/03

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Great development potential for bond market (% of GDP, 2003)

Bank Credit * Equity Market Bond Market* China 140 36 33 Hong Kong 149 451 27 India 36 42 33 Japan 107 68 169 Korea 115 49 81 Singapore 112 144 66 Taiwan 125 133 33 Thailand 82 83 38 UK 154 135 68 US 78 130 156

* Figures as of 2002 Sources: World Bank, IMF, WFE, CEIC, Bloomberg, BIS, International Financial Statistics, various central banks and government websites

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Prudential framework

• Rule of Law
• International regulatory standards



Policy

• Freest economy for 9 years (1995-2003) ranked by the Heritage

Foundation.

• Low tax rate and simple tax system, backed by sound FX

reserves of US$118.4 bn as of end Sep 2004 (the 6th largest in the world)



People

• Critical mass of institutional investors and intermediaries
• Wealthy, high savings rate and deep risk appetite



Platform - Sophisticated financial infrastructure



Products - Wide range of financial products and derivatives tools including stocks, warrants, futures, options, EFNs, corporate bonds, funds ...

Secrets behind HKSAR’s Success: The 5 Ps

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Overhaul in Corporate Governance

♦ Overhaul of listing rules including:

• Transactions requiring shareholder approval
• Minimum 3 INEDs
• Audit committees

♦ Clear obligation for sponsors from I January 2005

• Reasonable due diligence
• Practice note of typical due diligence steps

♦ Code of Corporate Governance Practice from I January 2005

• Comply or explain
• Based on UK Code

♦ 2005 Legislation to give statutory backing for listing rules

• Financial reporting and periodic disclosure
• Price sensitive information
• Shareholder approval for certain transactions

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World Class Financial Reporting

♦ For financial years starting 1 January 2005, Hong Kong FRSs will be word for word identical to IFRSs ♦ Hong Kong FRSs will include IAS39 ♦ 2005 legislation to introduce

• Financial Reporting and Review Panel (FRRP) with

authority over financial statements

• Independent Investigation Board to investigate audits

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Rising standards and enforcement successes



New laws raised standards and gave extra enforcement powers

• Tougher penalties
• More effective dual civil/criminal system for securities fraud
• Listed company disclosure subject to criminal penalties and

listings to SFC veto

• Court orders to fix listed company misconduct and oppression
• New sanctions for intermediary misconduct



Enforcement successes

• First listed company disclosure conviction
• Rising custodial sentences for market manipulation
• Continuing insider dealing successes make HK’s tribunal regime

world class

• Tougher intermediary sanctions, pragmatic settlement policy
• Record number of listed company investigations and referrals of

suspected crime for Police investigation

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Pearl River Delta (PRD) and Yangtze River Delta (YRD) are structurally different but complementary

 PRD – external, HKD based, services  YRD – domestic, RMB based, industries

Area (sq km) Population (million) Exports - goods (US$ bn) Imports - goods (US$ bn) Trade / GDP (%) Per capita GDP (US$) GDP (US$ bn)

• primary

(%)

• secondary

(%)

• tertiary

(%)

YRD 100,201 75.6 92.3 82.8 76% 3,056 231.0 7% 52% 41% PRD 41,294 47.9 314.0 308.5 221% 5,883 282.0 2% 27% 71%

Source: Hong Kong Trade Development Council website

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Thank You