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2004 and beyond - HKEx’s perspective

Paul ChowChief Executive, Hong Kong Exchanges and Clearing LtdPresentation at Economic Summit 200416 December 2003

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HKEx has recently completed a strategic planning exercise

To implement the Strategic Plan, we will need the support of our stakeholders and market players like you.

This presentation highlights the vision, directions and key strategies of HKEx in the next 3 years

A special focus will be given to our strategies in China development, market infrastructures and investor protection.

2004 and beyond - HKEx’s perspective

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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1. HKEx’s roles

Maintain an open, secure, fair, orderly and transparent marketplace contributing to HK’s status as an international financial centre and premier capital market for China

Front-line regulator of issuers Regulator of participants’ compliance with

HKEx’s trading and clearing rules

Operator of market infrastructures For-profit company Offer listing, trading, clearing & settlement and

information services

Public organisation

Regulator

Business entity

HKEx is a complex institution with at least 3 distinct roles

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1. HKEx’s role (cont’d)

HKEx has many stakeholders

Suppliers

Data vendors

SFC/ Government

Brokers

Investors

Issuers

Investment advisers /professionals

Shareholders

BanksStaff

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1. HKEx’s roles (cont’d)

In pursuing long-term success, HKEx has to balance its three roles and work closely with its stakeholders. There are various check and balance measures to avoid conflicts of interest.

Business

Public

Regulatory

Check & Balance

Check & Balance

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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2. HKEx’s vision

Operate a quality market

Focus on Mainland China and Hong Kong business

An independent exchange based in Hong Kong seeking closer cooperation with China counterparts

Focus on core market operations, including securities and derivatives trading, clearing, settlement and depository, information services as well as regulation

General

Geography

Status

Business scope

Goals

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2. HKEx’s vision

The mission of HKEx is to operate a world-class marketplace for Hong Kong and Mainland China securities and derivatives products. By offering issuers access to international capital markets and maintaining an open, secure, fair, orderly, efficient and transparent marketplace, HKEx contributes to Hong Kong’s status as an international financial centre and the premier capital market for China.

By servicing China’s substantial long-term demand for capital and exchange services in accordance with international standards and practices, HKEx has the potential to become one of the world’s pre-eminent exchanges.

Mission statement

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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3. Direction & Strategies

• A gateway for international players to access China

• Become one of the world’s larger exchanges with international standards and practices

Global positioning

GoalsGoals

• International gateway for Mainland issuers and (when possible) investors

• Become a domestic Mainland player in the long run

China positioning

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Building a quality market

Becoming a Mainland Partner

Consolidation• Cost rationalisation • Prioritise projects & streamline internal processes• Strengthen staff team• Strengthen risk management

• Strengthen regulatory regime • Foster corporate governance culture• Improve market infrastructures• Increase market liquidity• Raise customer satisfaction & investors’

confidence • Improve investor education/information

dissemination.

• Expand China offerings• Solicit Mainland investors (when

permitted)• Venture into Mainland domestic

business

HKEx will base its success on three building blocks

Time

3. Direction & Strategies (cont’d)

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China development

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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4. Key initiatives - China development

Achievements of the past decade

The largest offshore listing and trading centre for China stocks A total of 254 Mainland companies, including H share, red chip

and private enterprises, have been listed on HKEx. Their total market capitalisation as at Nov 2003 was HK$1,518 billion

Over HK$754 billion was raised by Mainland companies via IPO and post-listing fund raising

Seven out of eight largest IPO (capital raised > HK$10 bil) were Mainland companies

Trading of China stocks reached HK$864 billion, representing over 43% of total equity turnover

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4. Key initiatives - China development (cont’d)

-10

10

30

50

70

90

110

Number of H Shares and Red Chips

H Shares 6 15 17 23 39 41 44 50 58 74 89

Red Chips 32 40 41 46 59 63 68 69 69 72 72

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 *

Up to Nov

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4. Key initiatives - China development (cont’d)

Total Market Capitalisation (Nov 2003)

H shares5%

Red Chips22%

Others73%

Total Equity Turnover

H shares20%

Red Chips21%

Others59%

(Jan - Nov 2003)

Turnover of China stocks fluctuates from time to time. This year, H shares and red chip companies alone have contributed over 40% of total equity turnover. Their aggregate weighting in Hong Kong’s total market capitalisation is also large.

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4. Key initiatives - China development (cont’d)

Benefits for Hong Kong

Diversifying the portfolio of Hong Kong listed companies

Improving market width and depth

Creating a unique selling point to global player

Developing a sophisticated domestic pool of China market experts

Becoming the information hub for China market

China listing in Hong Kong has created a win-win situation

Benefits for Mainland China

Raising international capital to support its rapid economic growth

Speeding up enterprise reform, quality management and corporate governance in China

Facilitating the development of China’s capital market

Offering exposure to international standards and market practices

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4. Key initiatives - China business (cont’d)

Our vision

China, being a very large and developing economy, has vast long term demand for capital and exchange services

Such demand cannot be fully met domestically

As long as Hong Kong can maintain its quality advantage in the context of the Mainland market opening process, it can grow to a large scale in both cash and derivatives markets

Goals

Continue existing successful business on issuer side

When regulation permits, Hong Kong can serve Mainland investors and intermediaries too

Gradual opening of Mainland market under WTO and CEPA will provide opportunities for HKEx’s further involvement in Mainland business (in particular, Pearl River Delta region)

In the next 3 years, HKEx will continue to improve its services to Mainland and seek new business opportunities there

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4. Key initiatives - China business (cont’d)

Attract more major, high quality Mainland enterprises Enhance listing services to Mainland issuers

Develop China-related products (e.g. H share index futures/options)

Explore crude oil contract with Shanghai Futures Exchange

Explore cooperation with Shenzhen Stock Exchange

Promote HKEx’s business on the Mainland When permitted, facilitate Mainland investors’ access to

HK Explore possibility of allowing Mainland EPs’ access to HK

China listing

China products

Marketing & others

Cooperation

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China development

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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5. Key initiatives - Market infrastructures

1993 1996 2000

1999 2000 2001 2003

1992 2003

Launch of AMS Launch of off-floor trading system Launch of AMS/3

Launch of HKATS Abolition of Trading Floor Migration of stock options trading to

HKATS HKATS upgrade (OMex 17.1)

Launch of CCASS CCASS/3

A critical factor of Hong Kong’s success is the offering of efficient, secure and reliable market infrastructures.

Cash

Derivatives

Clearing

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5. Key initiatives - Market infrastructures (cont’d)

Ensure that market infrastructures and operations meet international standards

Offer secure, reliable, efficient and high quality market infrastructures

Increase operational efficiency and reduce operating costs

Launch of DCASS Harmonise and where appropriate, consolidate derivatives clearing

operations Increase immobalisation of securities in HKSCC Depository Strengthen the reliability, security and availability of market

systems Explore the potential and market impacts of a scripless market Introduce Enhanced CCASS Investor Participant Account services

Explore the possibility of network consolidation (i.e. AMS/3, CCASS/3, HKATS and Market Data Feed) to seek cost reduction without sacrificing serviceability and manageability

In the next 3 years, HKEx will continue to ensure that our market infrastructures meet the demands of our customers and the changing marketplace

Network

Market System

Policy

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China development

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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6. Key initiatives - Investor protection

Improve the listing regulatory structure based upon the outcome of the Government review

Revamp the Listing Committee’s role in decision-making and related structures

Improve disciplinary process

Promote the statutory backing for selected Listing Rules Further develop corporate governance Review initial listing criteria and continuing obligations Consider delisting mechanism Regulate sponsors and IFAs

Investor confidence is vital for the success of HKEx markets. In the next three years, HKEx will take action to enhance the current structure, policy and operations to boost investor confidence

Structure

Policy

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6. Key initiatives - Investor protection (cont’d)

Practice

Review and improve enforcement process Improve efficiency of listing application and IPO

vetting process Increase transparency of Listing Unit’s

operations Improve investor education Further improve Listing Unit’s staff quality and

service culture Seek to improve directors’ understanding of

Listing Rules and regulatory requirements Foster closer working relationship with other

regulatory bodies

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Agenda

1. HKEx’s roles

2. HKEx’s vision

3. Direction and strategies

4. Key initiative - China development

5. Key initiative - Market infrastructures

6. Key initiative - Investor protection

7. Conclusion

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7. Conclusion

The rapid growth of China’s economy and its opening will create new opportunities for Hong Kong securities and derivatives industry

HKEx’s future success will be built on three building blocks: consolidation, building a quality market and becoming a Mainland Partner

Expansion of our Mainland business, improvement of our market infrastructures and the strengthening of investor confidence will be the key to the accomplishment of our goals.

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THANK YOU !