Hong Kong Eyes Link-Up with Mainland Bourses

By staff reporter Xu Ke  

Will booming stock markets in Shanghai and Shenzhen overshadow Hong Kong’s powerful bourse? "Never", says Fang Zheng, chairman of the Hong Kong Securities and Futures Commission(SFC). Yet he also said, “Someday, we will merge.” 

Fang spoke in an exclusive interview with 10 years after Hong Kong’s return to China, at a time when the Hang Seng Index has climbed to new heights. In his opinion, Hong Kong’s advantage lies in its ability to operate a multilayer, cooperative system that's supported by the mainland. 

“A good financial center has to have three prerequisites: Talent, quality regulation, and a financing system,” Fang said. “Hong Kong has them all -- and the advantage is obvious.” 

But faced with challenges from other financial hubs – New York and Singapore as well as Shanghai and Shenzhen – how can Hong Kong hold its ground? One way is to link the Hong Kong and mainland markets. “It’s a step-by-step process,” he said. 

: Last year, the total amount of funds raised through the Hong Kong stock market (including its main and second boards) was the second largest in the world. However, in recent years, new stock markets in Asia have been fiercely competitive. The trading capital of the Shanghai stock exchange surpassed that of Hong Kong last year. What is Hong Kong’s answer to that? 

Fang: Both the stock market and real estate market reached their peaks on July 1, 1997. Ten years later, they rallied to new highs. And we believe that in 10 years, the mainland, Hong Kong and other main stock exchanges will all peak again. The total market value of Hong Kong-listed stocks is now eighth in the world. Last year, many mainland enterprises were listed in Hong Kong, which put the amount of funds raised through our bourse above New York’s. But I do not believe it will happen every year. We should be more realistic and do more to amplify advantages of the financial policy in Hong Kong.  

The financial situation in Hong Kong does not only rely on the stock market. Being a global financial hub brings various demands. For example, Hong Kong is doing quite well with assets management. The 4.5 trillion yuan held by Hong Kong-based fund management companies propels development. 

Last year, capital raised through the Shanghai stock exchange surpassed that of Hong Kong. But we still have no reason to worry too much because Shanghai and Shenzhen together represent the whole country, while Hong Kong is a minor region. 

Many foreigners have raised the question, “Will Hong Kong be replaced by Shanghai, since the latter has opened to the outside world?” I think China is big enough to have two financial hubs and two, main stock exchanges. Moreover, these two stock markets may each have their own characteristics -- different kinds of stocks and firms entering different markets. We are trying to find a path to link the two markets. But it takes time, since it's a step-by-step process. 

: Recently, we heard that regulatory authorities have set a higher threshold for mainland enterprises to be listed in Hong Kong, a signal that the regulator is encouraging them to issue IPOs on the mainland. Does this mean that Hong Kong faces the disappearance of listed company resources? 

Fang: We communicate frequently with the China Securities Regulatory Commission. Their explanation is as follows: There are no special changes in policy. Some companies may not be listed in Hong Kong because of changes in the market. If mainland enterprises need renminbi instead of foreign currency to finance, they will consider it better to be listed as an A-share. And the P/E ratio there is higher than in Hong Kong. 

State-owned enterprises – large, mainland, state-owned enterprises such as China National Petroleum Corp. and China Life Insurance -- listed shares in Hong Kong because the Shanghai stock market used to be small. Some of them even went to the United States, since the scale of their financing was too large for the mainland market. That made sense.  

Considering these factors, some people in Hong Kong feel frustrated. They wonder whether Hong Kong can maintain its position as a financial center over the next five or 10 years.  

I am confident about that because Hong Kong has many advantages including a good foundation, mature mechanism and thorough legal system, good corporation governance, smooth coordination among different banks, a large pool of financial talents such as fund managers and financial analysts, a mix of eastern and western cultures, rapid information dissemination, and a free flow of capital. 

Under the policy of "One Country, Two Systems," Hong Kong's leading position can’t be lost in one or two days. If Shanghai wants to catch up, it must run one step at a time.  Hong Kong also needs to optimize its current system.      

: Supervisors of financial markets usually face the issue of balancing market supervision and innovative development. Could you define the proper degree of supervision?  

Fang: There are no answers, nor an existing formula. This is an issue of balance. We supervisors have to take the market’s development into consideration. If supervision is too rigid, supervisors will have no market to oversee. But supervision is indispensable. Without it, a poor-quality market will not attract good companies with IPOs.  

Last year, a survey by the City of London Corp. found that a good financial center has to have three prerequisites: Talent, quality regulation, and a financing system. Hong Kong has them all -- and the advantage is obvious. So balancing these is the most critical factor.  

: Nowadays, stock markets around the world are vying for IPO resources and hope to offer better services and cross-time-zone transactions through acquisitions and mergers. Does Hong Kong have similar intentions? 

Fang: A little. But we haven't thought about it too much. As far as I know, the Hong Kong stock market does not have special interest in this field. Although the Singapore bourse bought a stake in the Mumbai stock exchange, directors of the Hong Kong stock exchange are not keen on small-stake investments and alliances, because acquisitions and mergers have to bring added value. Without added value, there's no point to it.  

Unlike stock exchange operators, an alliance of brokers is much easier than a merger of different bourses. You can buy whatever you want. Brokers started joining hands to ease the liquidity of stocks. It's not as meaningful for bourses to merge to attract more investors.    

: Is it possible for the Shanghai, Shenzhen and Hong Kong exchange markets to merge? 

Fang: It is possible, but not now because the mainland still has a foreign exchange restriction and there is no freedom to float both A shares and H shares. The bourses are waiting for it. Someday, we will merge.  

If Shanghai completely opened, how would it be positioned? When merged, we’re one family. There is no need for any competition. We would discuss what they do and what we do. This could be one option.  

After all, it is not a concern for we supervisors. It’s the business of the stock exchanges themselves. They’re listed companies and their priority is seeking profit for the shareholders.  

1 yuan = 13 U.S. cents