THIS year marked a turning point in the developments of the Hong Kong stock exchange in terms of its development as a regional centre. A spate of successful H-share listings cemented the territory's reputation as a financial centre capable of meeting China's capital-raising needs. Eleven mainland companies have so far been listed in Hong Kong compared with five in the United States. Hong Kong listings have been, by and large, more successful than US listings, where investors have become weary of hearing the China growth story so many times. This means Hong Kong will continue to be the most attractive centre for Chinese companies to raise capital. This is just as well, because there is not much room left for growth in local listings. Hong Kong companies that listed this year were smaller in terms of capitalisation than in previous years. With a couple of exceptions, the firms listed this year did not perform well after their debut. Most of the territory's big companies capable of listing have already done so and, like a once-plentiful fishing ground now depleted, newer listings tend to be smaller and weaker than their predecessors. So far this year, just 37 equity companies have been listed on the stock exchange, compared with 64 for last year. The average market capitalisation of the newly listed firms was just $729 million, compared with an average market capitalisation of $4.78 billion for the whole market. Obviously, the listing plans of some companies were affected by the market's crash in February, but it would appear that the massive growth in listings since 1990 is slowing. In 1989, there were just 298 listed companies with a total market capitalisation of $605 billion. By the end of September this year, the number had grown by 73 per cent to 514 listed companies, while total market capitalisation more than trebled to $2,465 billion. Most of the growth in market capitalisation came from existing companies benefitting from Hong Kong's economic growth, rather than from new listings. This means that, for the exchange to grow and satisfy the demand of hungry fund managers with a mandate to buy stocks, it must find new companies to list - a fact agreed by the exchange's head of listing, Herbert Hui. 'Hong Kong is a small place. If you count the number of companies which meet the listing requirements and have a three-year track record, there are clearly not enough,' he said. 'The growth in indigenous Hong Kong listings is limited, so we must look to other areas for new growth.' More by good luck than planning, China has proved a major source of new listings and the exchange is devoting most of its efforts to woo mainland companies. The exchange's listing division had worked hard to attract mainland companies and Hong Kong should get the lion's share of the 22 share listings scheduled in the second batch of mainland firms. In its report, The Way Forward, published in March, the exchange singled out China as the most important area of future growth. Other areas of growth were to come from gaining more secondary listings on the exchange and through the listing of new derivative and debt products. The exchange is well on its way to rivalling Tokyo in its sophistication of listed instruments and derivatives, which act as a magnet for large securities houses and naturally raise the importance of the exchange. Next year, traded options will be introduced and the listing rules for debt securities have already been streamlined. These are all steps in the right direction, but fall short of offering a strategic view of how Hong Kong could develop as a 'regional capital market for Southeast Asia', as described in the report. But beyond attempts to attract more China listings, there is little in the way of proposals to expand the role of the exchange to attract international listings, which could make Hong Kong a truly regional market. That the region is brimming with up-and-coming super companies that could become the General Motors of tomorrow is undoubted. Whether Hong Kong can position itself to become the stock market of choice for these companies is the big question. To be successful, the exchange must offer these companies something that the stock exchanges in their own markets could not. Otherwise, why would an Indonesian company, for example, decide to list in Hong Kong rather than its home market. One possible path would be to create a special exchange for smaller capitalised stocks with easier listing requirements. In theory, Hong Kong could act as a regional stock exchange for smaller companies in the way that NASDAQ operates in the United States. The territory has the infrastructure, financial resources, brokerage firms and legal support that would make it a natural centre to nourish start-up firms from the region. The exchange is currently researching the idea, although no plans have been announced. However, it is unlikely the exchange will take such a bold step as NASDAQ has by allowing market makers to trade. The role of a market maker would be to quote a bid and an offer price on a security so that liquidity was maintained in a stock and investors could easily trade in and out without having to wait for a 'natural' buyer or seller to come along. Allowing companies to take on the role of principal, rather than acting as a broker, is a notion that would not sit easily with the exchange. 'Unfortunately, a lot of people associate market making with market manipulation,' Mr Hui said. There is also unlikely to be much support from smaller brokers for a move to market making, which favours large brokerage houses because it is a capital-intensive business.