THE strategic plan of the Hong Kong Stock Exchange can be summed up just in three words: China, China and China. In a territory where everything revolves around gearing up for the mammoth China market and the transfer of sovereignty in 1997, the stock exchange has wasted no time in making public its intention of becoming a major fund-raising centre for the mainland. Commanding a market capitalisation of $2.37 trillion, monthly turnover of 22.28 billion shares, and being the eighth-largest stock exchange in the world, there is no doubt that Hong Kong will play a significant role in the greater China region in the future. Hong Kong's proximity to and relationship with the mainland are its biggest assets in fending off competition from other regional markets, exchange officials say. Exchange officials concede however that Hong Kong's current lead over other markets in the region could be eroded quickly unless the market continues to develop. The question facing the exchange is where it should focus. Officials have yet to work out how to be a co-operative partner in China's securities market given that it already includes the Shenzhen and Shanghai stock exchanges. The exchange says that it wishes to become a major trading centre for internationally held China-related securities. Discussions with mainland counterparts will ensure that the number of H-share companies - China state-owned enterprises - will increase from the existing 18, officials say. Getting a slice of the B-share volume - China stocks traded by foreigners - in Hong Kong remains a distant dream, officials say. Developing the relationship with China offers a chance for the predominantly equity-based market to shift more to debt securities, they say. The Securities and Futures Commission (SFC), the securities watchdog, has set up the Research and Policy Unit to undertake a study of China's capital markets. Hong Kong's status will be boosted if China's government debt can be traded here. Officials say that courting new products is a sure way to proceed. Under consideration are renminbi futures, yuan index futures, H-share index futures and other soft commodities contracts. Opportunities are certain to expand considerably once the yuan becomes fully convertible, they say. Edgar Cheng Wai-kin, chairman of the exchange, has made clear his ambition that the market should become a major derivatives centre for China. Hong Kong already leads the region in the development of sophisticated over-the-counter (OTC) derivative products and, as the trading of these instruments is growing by the day , the regulator has commissioned a study on how to develop a regulatory regime for them. To show its flexibility, the exchange laid down clear guidelines which allowed infrastructure projects which do not meet the three-year profit-record requirements on listing to obtain a waiver. The abundance of mainland infrastructure projects will ensure a steady stream of applications, officials say. Although most attention is on the China market, the exchange is also offering new products that meet market needs and promoting itself internationally. Official say that some of the exchange's more troublesome issues will be solved this year. Top of the list is the illiquidity of second and third-liners, a topic on which the exchange recently released a consultation paper. Suggestions to improve the short-selling programme are in the pipeline, officials say. Rules on trading the latest stock-option products will be refined to stimulate interest. Calls for more new products are becoming more strident. Officials say decisions are likely to be made this year on setting-up a second board for smaller companies, trading-only listings for international or regional issues and a depositary receipts market. The introduction of these products will stimulate investor interest in the market, enhancing its position in the region and the international arena, they say. Maintaining market integrity at the same time as keeping pace with new developments is another challenge. Regulating electronic markets, the screen-based trading systems offering cross-border products; reviewing risk management systems; and improving market surveillance are essential to raising the market's international status, they say. Corporate governance still tops the exchange's agenda, officials say. The exchange, together with the SFC, will embark on a promotion programme that includes attending international meetings, beefing-up international links with other exchanges and increasing involvement in regional seminars and meetings. Such links have made it possible for the exchange to market Hang Seng Index futures and options to US investors and set up a link with Philadelphia Forex Options. Officials say that greater transparency and improved information flow are also effective means of luring funds into the market. The exchange will soon market its database to information vendors. As the exchange's 10th anniversary approaches, its profile will be raised significantly by its co-hosting in May of the Annual Assembly of the International Options Markets Association with the Hong Kong Futures Exchange. The exchange will also host the 36th General Assembly of the Federation Internationale des Bourses de Valeurs in November.