Keeping a steady hand on market reform

PUBLISHED : Monday, 22 December, 2003, 12:00am
UPDATED : Monday, 22 December, 2003, 12:00am

AFTER A SIX-YEAR absence, Paul Chow Man-yiu returned to head Hong Kong Exchanges and Clearing (HKEx) at a defining moment in its history.

Many would like to see the exchange lose its role as front-line regulator of listed companies, and in March this year it looked as if they were about to get their wish.

An expert group recommended the role be shifted to the Securities and Futures Commission (SFC). A government U-turn amid strong opposition from the exchange and tycoons with vested interests put the issue on hold, with a further round of consultation closing on December 31.

Mr Chow, who left the exchange's top job in 1997 to become regional head of HSBC Asset Management, rejects allegations that there is a conflict of interest in the exchange's regulatory role and its status as a listed company.

'We are committed to maintaining a quality market because it is everyone's long-term interest: our long-term interest, market participants' long-term interest, Hong Kong's long-term interest and the country's long-term interest,' he said.

'The HKEx will not put its reputation at risk by just letting the poor-quality firms list and earn the $100,000 listing fee. Do you think we are that stupid to do things to damage our branding?'

The HKEx chief executive believes stripping the exchange of the right to regulate the companies listed on it is an unworkable business model. 'It is just like running supermarkets where the managers have to choose what to put on the shelves. It would be impossible for a third party to choose the right goods for them,' he said.

However, critics of the exchange cited corporate scandals such as the rapid demise of Euro-Asia Holdings shortly after its listing and the high number of penny stocks in Hong Kong that are ripe for market manipulation.

Mr Chow said: 'You cannot avoid corporate scandals. This is because we cannot legislate morality. Corporate governance is more of a culture of ethics, integrity and common honesty.

'Even in the US and British markets, there are still corporate failures.'

Mr Chow would prefer to see an expansion of the dual-filing system, introduced on April 1, in which the exchange shares the task with the SFC of vetting new listings.

He agrees that some of the listing rules related to disclosure requirements, connected transactions and price-sensitive information should be passed to the SFC. The rules would gain statutory backing and those breaking them would face heavier penalties.

'Unfortunately, there seems to be some misperception about the so-called market quality issue. The problem in Hong Kong does not lie in the content of the stock exchange's listing rules or the body which administers them.

'The problem is, the listing rules do not have any statutory backing. By moving the important part of the rules to the SFC to have the statutory back up, it would help solve the problem.

'Improving the quality of the market is not merely the job of the exchange. We all need to work together - HKEx, the SFC, listed companies, sponsors, underwriters, investors, brokers, lawyers, accountants and valuers - to meet our responsibilities and to further improve the services, quality and standards of the stock market.'

A lengthy consultation process will satisfy companies and directors, but not those wanting quick change in the markets. The stock exchange has been criticised by lawmakers and some investors for being too slow to bring about changes, quarterly reporting being a case in point.

The exchange, which decided to add quarterly reporting to its code of best practices, has indicated companies will be encouraged, but not forced, to adopt a measure that has been in place on the mainland for two years.

Mr Chow said the exchange would review whether to make the requirement mandatory in 2005, the same year European countries were expected to switch to quarterly reporting, in line with practice in the United States. 'There are many concerns that quarterly reporting may lead to company management and investors focusing too much on short-term profits,' he said.

'Also, many Hong Kong companies worry the move would cost them too much time and money. Their views should not be ignored.

'We should find ways of increasing transparency of the market without increasing the financial burden on companies.'

As for those impatient at the perceived lack of urgency on reform, Mr Chow said the exchange had released consultation papers on matters such as tightening the regulation of listing sponsors and plans for a scripless market.

'The HKEx also introduced H-share futures and opened an office in Beijing,' he said of initiatives launched since his return to the exchange.

Mr Chow also sees a need to change listing rules related to the disclosure of directors' remuneration.

The exchange, pending SFC approval, will require that all companies disclose individual directors' remuneration by name. Another item on his quick-fix list is the initial public offering process.

Mr Chow last week aired criticisms over recent of IPOs, highlighting the printing errors in newspaper announcements of the share allotments in the China Life Insurance offer.

'The listing sponsors should have a duty to ensure the IPO process runs as smoothly as possible. The HKEx and the SFC will follow up on the incident and will study how to make changes to the IPO process,' he said.

Mr Chow's cautious approach has won him the support of brokers and analysts, as has his past record at the exchange.

He spent 16 years at Sun Hung Kai Securities and Sun Hung Kai Bank before joining the stock exchange in 1989. Mr Chow became chief executive by the end of that year.

During his first tenure at the exchange, he introduced the electronic clearing system CCASS and the electronic trading system AMS, and oversaw the launch of stock options and H-share listings.

His departure from the stock exchange in 1997 surprised the market and many speculated his departure stemmed from conflict with the then chairman Edgar Cheng Wai-kin.

However, Mr Chow said: 'My departure had nothing to do with Dr Cheng, whom I recognise as a man with the highest degree of integrity. I left only because I wanted a change after eight years.'


Paul Chow Man-yiu took up the post of chief executive of Hong Kong Exchanges and Clearing on May 1 after six years as head of HSBC Asset Management Asia Pacific ex-Japan. From 1991 to 1997, he was chief executive of the stock exchange after heading the clearing houses for three years. He worked in Sun Hung Kai Securities for 16 years, after three years with IBM. An engineering graduate of the University of Hong Kong, he gained an MBA from the same university and a diploma in finance from the Chinese University.