International listings key to success
As the Shanghai Stock Exchange (SSE) prepares to develop an International Board to attract overseas companies, financial experts say the Hong Kong stock exchange remains well-placed to maintain its leading regional financial status.
Concerns about the Hong Kong Exchanges and Clearing (HKEx) losing ground to Shanghai grew after the central government unveiled a timetable which aims to see Shanghai become an international financial centre by 2020, aside from its role as a national financial centre. While new regulations will help make Shanghai a global financial centre, both the Shanghai Stock Exchange and Shenzhen Stock Exchange impose restrictions on foreign investors.
Terence Ho, Ernst & Young's Greater China strategic growth markets leader, says an emphasis should be placed on growing Hong Kong's attractiveness as an international listing centre.
Ho says expanding Hong Kong's stock exchange by attracting international companies to publicly list in the city requires maintaining the building blocks that have made it a world-class financial centre.
'It is important that Hong Kong maintains its good set of listing rules and mechanisms to make sure that companies and other players involved in the listing process meet compliance [standards],' Ho says. 'High-quality issuers and their intermediaries will always choose to establish a presence in markets where rules provide them with fair treatment.
'The HKEx has done well in two important areas. It has developed an exchange of choice for China issuers looking for international investors. It has also developed an exchange of choice for global issuers and investors looking to tap into the mainland market. We have received a lot of inquires from our clients in Europe, South America and various Asian countries about listing in Hong Kong.'
Edmond Chan, a partner with PricewaterhouseCoopers, Capital Market Services Group, says the Shanghai Stock Exchange serves as the key fund raising market for domestic companies and mainland investors. At the same time, Hong Kong serves as a centre for the international community to invest in Hong Kong and mainland companies.
'At the moment there is a distinct difference between the mainland and Hong Kong stock exchanges,' Chan says. 'On the mainland, there are investment restrictions on foreign investors. Until there is a complete revision of the financial rules and regulations, Hong Kong will maintain its position as the regional financial centre for the international investing community. When Shanghai establishes its International Board, there will be a good opportunity to build on alliances which should benefit both jurisdictions.'
Andrew Lam, Grant Thornton's assurance partner, says it should be recognised that the Shanghai, Shenzhen and Hong Kong stock exchanges attract different types of companies. 'In the long-term, Shanghai, Shenzhen and the Hong Kong stock markets should continue doing what they are doing, which is working together,' he says. 'There is, of course, competition, but the competition is friendly. We must not forget that Hong Kong is competing with other capital markets regionally, for example Singapore, and with different time zones, including New York and London.
'I would say the HKEx has been very successful. The HKEx makes very good use of Hong Kong's core financial strengths including strong corporate governance requirements, the rule of law, stringent listing standards and professional services provided by corporate lawyers, accountants and analysts. Stock markets are not like manufactured goods, there are many intangibles, and it takes time to build up confidence and critical mass.'
Following the Closer Co-operation Agreement last year, the HKEx and SSE met again in January to discuss how the two organisations could work together more closely towards the common goals of mutual prosperity and contributing to the greater development of the mainland's economy.
Last year, Shanghai was the sixth largest stock exchange in the world, ranking just below the London Stock Exchange and just above the Hong Kong stock exchange. Shanghai's market capitalisation at the beginning of last month was 15.2 trillion yuan (HK$ 17.3 trillion).
Under the terms of the agreement, the HKEx's listing division and the SSE's company management department have established a mechanism for regular exchanges in order to more effectively regulate companies and securities listed in both Shanghai and Hong Kong, and better protect shareholder interests.
Speaking at the time of the meeting, HKEx chairman Ronald Arculli said that through co-operation and exchanges with the SSE, the HKEx would be able to learn more about the behaviour and needs of mainland investors, and how the HKEx could further support the Qualified Domestic Institutional Investor scheme.
He said the two stock exchanges could learn from each other about market dynamics created by the growth and development of SSE and HKEx, and the latest market trends on the mainland and Hong Kong.
Writing in the latest edition of HKEx's magazine, Exchange, HKEx's CEO Charles Li Xiaojia says competition is natural and the HKEx should not seek to avoid it.
'What we should seek to avoid is complacency or a sense of entitlement,' Li says. 'We have to be prepared to maintain a strong value proposition for investors and issuers to keep [them] coming back to us. We also need to advocate the necessary regulatory and market reforms to prepare for the strategic expansion of our business.
'I don't expect all investments to pay off overnight, but I am convinced they will over time. We have to strike the right balance between maintaining the strong points of our current businesses and investing for the future. I know many think we are competing with the Shanghai or Shenzhen markets, but the reality is that we all are better served through co-operative measures. We have also been attracting new listings from Canada and Russia. We have received more inquiries recently from potential issuers based in other jurisdictions, including Brazil.'