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HKEX chief executive Nicolas Aguzin speaks during the the exchange’s Corporate Day on March 29, 2022. Photo: Handout

Foresight and fortune: Hong Kong stock exchange thrives on 25 years of China-driven success as CEO Aguzin writes the next chapter

  • The HKEX has recorded impressive growth since the historic handover, based on nine yardsticks compiled by the Post
  • Early market stewards, including former chairman Edgar Cheng, recall key turning points from 1997-2000 that led to its transformation and success

In the 25 years since the handover, Hong Kong has strengthened its role as Asia’s premier financial hub, outgunning regional peers to become the top venue for global stock offerings and the busiest market outside mainland China and Japan.

The value of 2,573 companies listed in the city has grown 12 times to HK$38.9 trillion (US$5 trillion) since 1997, while the average daily stock turnover has multiplied 10 times in the span. In nine yardsticks compiled by the Post, growth has compounded at impressive rates in terms of fresh capital raised and public investor participation.

Much of that growth dividend was built on the foresight and groundbreaking market reforms by its key stewards, as Edgar Cheng recalls, soon after the city’s return to Chinese sovereignty from British rule, a watershed event that generated much trepidation and great optimism.

“Back in 1997, the securities markets globally were implementing new structures and business strategies to enhance their competitiveness,” said Cheng, then chairman of the stock exchange. “We were not doing that as our exchanges were still a membership-based organisation.”

From the archives: Edgar Cheng Wai-kin, who chaired the stock exchange during the 1997 handover.
More than two years of planning led to the combination of the Stock Exchange of Hong Kong, Hong Kong Futures Exchange and three clearing houses. The merged entity, Hong Kong Exchanges and Clearing or HKEX, was created in March 2000 and listed itself three months later.

“The reform allowed [Hong Kong] to grow into one of the world’s largest stock and futures markets and a major fundraising hub for both the mainland and Hong Kong companies,” Cheng said in an interview with the Post. “Much beyond everybody’s expectations.”

The city has continued to be a fertile ground for companies to raise fresh funds, even as the local economy has struggled with the deepest recession on record following the Covid-19 pandemic and the measures to combat the coronavirus.

Last year, 98 companies raised HK$328.9 billion from public offerings, a fourfold jump from 1997, according to exchange data. Until recent hiccups, Hong Kong topped global rivals like Nasdaq and New York Stock Exchange as the world’s largest IPO venue seven times in the past 13 years.

“Since 1997, there have been over 1,700 IPOs in Hong Kong, raising over US$600 billion, making Hong Kong one of the best active listing venues of choice for companies across all sectors,” said John Lee, vice-chairman and head of Greater China global banking at UBS.

While mainland banks such as Industrial and Commercial Bank of China and Agricultural Bank of China dominated the scene in the mid-2000s, the TMT (technology, media and telecommunication) and healthcare sectors have become the market’s new darlings, he said.
The city’s fortune clearly has a lot to do with China’s rise as an economic superpower, more so over the past two decades since its accession to the World Trade Organization. The WTO ticket turned every major assembly line in mainland China into a factory for global brands like Tesla, Nike, Mattel and Coca-Cola.

HKEX has latched onto that advantage by making itself the “connector” between capital-hungry mainland companies and global investors seeking outsize returns from many of the fastest-growing Chinese enterprises.

Charles Li Xiaojia, who led HKEX for 11 years until the end of 2020, helped initiate the Stock Connect scheme, linking Hong Kong and Shanghai in 2014, and with Shenzhen in 2016. The move allows two-way flow of capital from mainland and foreign investors within China’s capital-control regime.
Bond Connect, a similar conduit to facilitate fixed income products, was introduced in 2017, while the Wealth Management Connect scheme came into reality in 2021.

For better or worse, those developments and diversification have burnished Hong Kong’s reputation as “China’s offshore capital market”. The exchange, though, is no closer to its aspiration of becoming the global marketplace.

Today, more than half of the listed companies in Hong Kong are mainland Chinese enterprises, according to the latest stock exchange data. They accounted for 78 per cent of the HK$38.9 trillion market capitalisation versus 15 per cent in 1997.


HKEX CEO Nicolas Aguzin on the future of Hong Kong’s capital market

HKEX CEO Nicolas Aguzin on the future of Hong Kong’s capital market

Some 87 per cent of the HK$146.53 billion average daily stock trading volume involves them. Eight out of 10 largest fundraising by new listings have been from mainland companies.

HKEX stood among its beneficiaries. The stock reached an all-time high of HK$567 on February 19 last year, giving it a market value of US$92.7 billion, larger than market operators Chicago-based CME Group and New York-based InterContinental Exchange and the London Stock Exchange Group (LSE).

One lot of 1,000 HKEX shares worth HK$3,880 on its debut in June 2000 is worth HK$324,800 today, ignoring the effect of inflation. That works out to an annual compound growth rate of 22 per cent. In comparison, an index of home prices in the city grew by 7 per cent annually over the same period.

Chinese internet-platform operators, led by Alibaba Group Holding – owner of the Post, Tencent Holdings and Meituan, now populate the top 10 biggest companies in the city. Among 1997 industry stalwarts, only China Mobile and HSBC Holdings have retained their presence, while the likes of Sun Hung Kai Properties, CLP Holdings and Swire Pacific dropped out of the list.


Hong Kong’s Cathay Pacific Airways posts record loss of HK$21.6 billion for 2020

Hong Kong’s Cathay Pacific Airways posts record loss of HK$21.6 billion for 2020

In other measures, the net asset value of mutual funds in Hong Kong has risen to US$1.93 trillion while the derivatives contracts trading has surged nearly 30 times from 9.7 million contracts a year in 1997 to 288 million in 2021.

The hardest part, though, may lie ahead for the HKEX group. It is seen as too reliant on the China card, while its merger and acquisition activities have produced a mixed bag of results. The failed £32 billion (US$401 billion) bid for London Stock Exchange in October 2019 comes to mind. Its ownership of the London Metal Exchange, its first overseas acquisition in 2012, recently drew flak for the nickel futures fiasco.

“While HKEX has been very successful in expanding its China-related business in the past 25 years, it lacks diversification as Hong Kong remains heavily reliant on stock trading,” said Robert Lee Wai-wang, the lawmaker for the financial services sector and chief executive of Grand Capital Holdings. “The IPO market is dominated by mainland firms and there are only a few international firms listing here. We want to see more products and more international companies list here.”

Enter Nicolas Aguzin, the 53-year-old former head of global private banking at JPMorgan Chase tapped to lead the bourse after Charles Li in May 2021.

Aguzin is writing the next chapter of HKEX’s growth by setting up new offices in the US and Europe over the coming 12 months to rebuild its case as a top listing venue for global companies. The city only has 158 international companies, representing 5.1 per cent of the market cap.

“We don’t want just to be a fundraising hub looking for international capital for Chinese companies. We want to be much more than that. We want to be able to provide international companies the ability to come to an exciting market like ours, to raise money and raise their profile,” he said.

China’s capital markets will grow from US$30 trillion today to more than US$100 trillion by 2030, Aguzin said. The group believes this will create a once-in-a-generation opportunity for markets in Hong Kong, Asia and across the world.

HKEX CEO Aguzin speaks at the annual meeting of the World Economic Forum in Davos, Switzerland in May 2022. Source: Handout

“We can be the marketplace of the future,” Aguzin said. “That requires a transformation that will take place over the next few years.”

That certainly will take time. While Hong Kong can lay claim to Asia’s third-largest stock market after Japan and Shanghai, its role as an international financial hub is being challenged, as Beijing cemented its grip on power in the city. Stringent Covid-19 curbs have also diminished its appeal among businesses, prompting an exodus of financial-market expatriates.

“The challenges today are very different,” said Anthony Neoh, who was chairman of the Securities and Futures Commission between 1995 and 1998. He also served as the chief adviser to the China Securities Regulatory Commission from November 1998 to June 2004, at the personal invitation of former premier Zhu Rongji.
Former SFC chairman Anthony Neoh says Hong Kong will definitely have a role to play in China’s future economic growth story. Photo: Handout

“China’s onshore capital markets are much larger in size than Hong Kong’s now,” said Neoh. “This raises the question whether investors still need Hong Kong as a gateway into the mainland market. The answer to which is yes, as Hong Kong is a free economy and has a fully convertible currency.”

“Sanctions, geopolitical tension and Covid-19 are creating fear among investors and money is being moved from other currencies into the US dollar as the perceived safe harbour,” Neoh added. “Risk concentrations are the essential ingredients of financial crises.”

And in spite of its diversification moves, Hong Kong is likely to become “more Chinese.” Listing reforms since 2018 have paved the way for companies with multiple classes of voting rights to sell shares to local investors. The door has also been opened for promising biotechnology firms without a profit track record.

Under pressure from delisting and accounting rules, many of the 273 US-listed Chinese companies are likely to make a beeline for primary or secondary listing on Hong Kong’s stock exchange to preserve or expand their access to market funding.


Hong Kong can become M&A hub for mainland companies expanding overseas, says former regulatory head

Hong Kong can become M&A hub for mainland companies expanding overseas, says former regulatory head
UBS’s Lee said Hong Kong can still attract big names, as highlighted by Italian fashion house Prada and French skincare company L’Occitane to list here. The internationalisation of the Hong Kong stock exchange will continue in the years to come, he added.

As long as Hong Kong remains an efficient, fair and transparent market it will continue to attract both regional and international capital, Cheng the former exchange chairman said. Hong Kong remains a major platform for mainland companies to raise capital, he added.

“For the past 25 years, Hong Kong has been a platform for mainland companies to raise funds,” Neoh said. “In the next 25 years, it is more likely to act as a platform for mainland companies to invest globally. Hong Kong will definitely have a role to play in China’s future economic growth story.”