A toast to 20 years of H-share listings
It is two decades this month since the beer flowed in celebration as Tsingtao Brewery became the first H-share listing in Hong Kong
Tsingtao Brewery, the 110-year-old mainland brewer, entered the history books 20 years ago when it became Hong Kong's first H-share listing.
At its listing ceremony on July 15, 1993, then stock exchange chairman Charles Lee Yeh-kwong and other executives used beer instead of champagne for a toast.
Lee and other members of the Stock Exchange of Hong Kong spent more than a year lobbying then premier Zhu Rongji to let mainland firms list in the city.
H shares have since come a long way, turning into a major part of the local market. There are now 176 H shares listed in the city, representing a fifth of the local market capitalisation and nearly two-fifths of turnover. When all types of mainland concerns are counted - H shares, red chips and privately owned firms - they represent more than half of market capitalisation and nearly three-quarters of turnover.
H shares are those state-owned firms listed in Hong Kong, while red chips are overseas incorporated companies with mainland-backed parents.
Lee started the lobbying effort to get mainland firms listed in Hong Kong when he became chairman of the stock exchange in January 1992.
"The lobbying was not really so hard, because both the mainland and Hong Kong markets had problems and the listing of state-owned enterprises in Hong Kong was seen as the best solution," Lee said.
He said that in 1992, all the major companies in Hong Kong, with the exception of the MTR, were listed on the local market and it was difficult to get big new listings. In addition, most companies were property firms or banks, and it was believed that letting mainland firms in would help diversify the market.
"On the mainland, the state-owned enterprises faced two major issues at that time," Lee said. "First, they did not have the technology to compete internationally and they needed to raise huge amounts of capital to buy machinery, technology and management skills from the international market."
Another problem, he said, was that many state-owned firms were not run as commercial entities. "Many enterprises had to take care of many retired employees, while they also had to provide all the social service facilities for their staff, ranging from nursery homes, hospitals and schools to funeral homes," Lee said. "Some companies had 200,000 staff but only about 20,000 were doing the core business, while the rest were either retirees or those who provide the community services."
Lee said Zhu accepted the stock exchange's proposal to let mainland firms list in Hong Kong in order to solve both sets of problems in one go.
"The state-owned companies needed to list in Hong Kong as they needed to raise funds that were freely convertible into US dollars, yen, sterling or European currencies to buy machinery around the world," he said.
Lee said that, most importantly, listing in Hong Kong also meant they had to comply with Hong Kong and international standards in terms of disclosure and corporate governance.
"This is how they could restructure all the state-owned enterprises in the past 20 years, by separating their core business units from their social, community services and let them run on a commercial basis," he said.
Lee said there were a lot of challenges at the time, including the fact that many mainland officials and executives had no idea of their responsibilities in a listing. The stock exchange had to arrange many seminars and let Hong Kong accounting firms, lawyers and investment banks help with the restructuring.
Lee said some mainland officials and Hong Kong executives had proposed letting H shares list on a second board, called the China board, which would only follow some international accounting standards.
"I objected to letting mainland firms list on a China board with lower standards because that would be like being born as a second-class citizen," he said. "It would be impossible to sell to international investors if the mainland firms were listing with mainland accounting standards that were not known to international investors."
Fortunately, Lee said, Zhu supported his idea and mainland firms listing in Hong Kong had to comply with international standards.
"Former premier Zhu Rongji was the man behind the H shares," Lee said. "It was also he who chose the name H shares to represent Hong Kong. We submitted a list of proposed names to him including W shares for World Shares and I shares for International shares. Premier Zhu chose H shares, as he considered that the best name to represent Hong Kong. And it is."