When H shares began listing in Hong Kong 20 years ago today, it was a win-win situation. The stock exchange wanted big listings that diversified the focus, which was then on property firms and banks. State-owned enterprises were hungry for capital in the major currencies for buying machinery and technical know-how from the international market.
H shares marked the start of China's financial reforms and economic changes and helped turn Hong Kong into a major financial centre. They became a proxy for rapid growth. They are now a major part of the market, with 176 stocks accounting for one-fifth of market capitalisation and nearly two-fifths of turnover. With red chips - overseas incorporated companies with mainland-backed parents - and private firms included, mainland concerns represent more than half of market capitalisation and nearly 75 per cent of turnover.
At the time, the introduction of H shares was in the nature of an experiment for China to get access to capital markets and an innovation that Hong Kong was keen to pursue. It kept our capital markets vibrant and relevant, while state-owned enterprises came to terms with Hong Kong and international standards of disclosure and corporate governance.
Amid China's slowdown and a lull in big listings, H shares are under-performing the market. But they remain an avenue of exposure to Chinese equities for global investors. Now, as the mainland opens up its capital account, Hong Kong needs to prepare for the day when it finds itself in head-to-head competition with stock exchanges across the border. True, they will have to offer better access to foreign investors if they are to take business from Hong Kong. But Charles Lee Yeh-kwong, former stock exchange chairman, rightly says the city will need to raise its game if it is to replicate its success as a fund-raising centre over the past 20 years. Now is the time to develop superior listing services backed up by better regulation and the rule of law - in a word, another landmark innovation.