Hong Kong needs to offer cheaper and better listing services to prepare for the competition with stock exchanges across the border when Beijing finally unshackles the yuan, says the man who played a key role in getting the first mainland companies to float in the city two decades ago.
Charles Lee Yeh-kwong, who as chairman of the erstwhile Stock Exchange of Hong Kong lobbied hard with then premier Zhu Rongji to allow mainland companies to list in the city as H shares in July 1993, said Hong Kong had been successful as a fundraising centre in the past two decades but would have to raise its game.
"When China removes its capital controls and the yuan becomes freely convertible, for international investors, there would be no difference between Hong Kong and Shanghai or Shenzhen," Lee told the South China Morning Post.
"If international investors are able to freely trade on the mainland, this would put Hong Kong in direct competition with the mainland stock exchanges."
Lee said the city would need to be prepared for this challenge.
"I don't worry about competition as it helps us to improve. When China fully opens up its markets, Hong Kong can still compete for mainland firms to list here if we can offer a cheaper and more professional services as well as better regulation," Lee said.
"We need to show we can offer the best protection to investors because of our rule of law and good regulation. The Hong Kong stock exchange would need to continue its marketing efforts to get the major mainland firms to list here."
Since Tsingtao Brewery listed in the city on July 15, 1993, there have been 176 H-share listings, raising a total of HK$1.52 trillion. H shares are stocks of companies incorporated on the mainland that are traded in Hong Kong.
Including the so-called red chips - stocks of mainland companies incorporated outside the mainland and listed in Hong Kong - and privately owned enterprises, a total of 740 mainland companies have listed in Hong Kong so far, raising HK$3.51 trillion over the past 20 years. They now account for 57 per cent of the market capitalisation and 72 per cent of market turnover. Of the 50 constituent stocks in the Hang Seng Index, 27 are mainland companies.
This heavy reliance on mainland firms worries analysts. Some have also aired concerns about small privately owned companies with governance problems. In addition, cross-border listings have raised regulatory concerns as it's impossible for the Securities and Futures Commission to investigate firms or directors based on the mainland.
Lee, however, believes mainland firms would continue to play a vital role in the local market.
"There are still many high-quality mainland companies that have yet to list," he said.
"Some individual privately held firms may have had governance issues but that should not be the reason to bar all mainland firms from listing here.
"It would be like banning people from driving to prevent accidents and ending up with no traffic at all."