The future development of Hong Kong equity market

Facts:– HK IPO fund raising size ranked first in 2009

and 2010– Chinese SOEs and increasing NHMPEs– Has been the major fund raising centre for

Chinese enterprises– A significant improvement in corporate

governance practices of Chinese enterprises listed in HK (study 1)

– Hong Kong has good corporate governance standards in the Asia Pacific region (study 2)

Vision:

–Hong Kong should be a prime market for quality companies (mainland and international) to raise fund

Improvement on Corporate governance practices for H-share companies:Research Methodologies

• Assign a CG score for major listed companies• Sponsored by HK Institute of Director• 2002, 2005, and 2008• Publicly available information• HSI, HSHKCI, HSCCI, and HSCEI constituent stocks• Number of listed companies 168 in 2002, 174 in 2005, and

146 in 2008

Scorecard Followed The Five OECD Corporate Governance Principles

OECD principle

Number of questions

2002

Number of questions

2008

A. Rights of shareholders

16 22

B. Equity of shareholders

10 13

C. Role of stakeholders

4 9

D. Disclosure and transparency

30 39

E. Board responsibilities

26 50

86 133

Corporate Governance Performance by Indices 2002

5HSI (恒生指數 ) HSHKCI (恒生香港綜合指數 ) HSCEI (恒生中國企業指數 ) HSCCI (恒生香港中資企業指數 )

30

35

40

45

50

55

60

65

70

75

80

Sc

ore

s

All

HSI HSHKCI HSCCI

HSCEI

Range

Mean

Weak

Strong

6HSCCI (恒生香港中資企業指數 ) HSCEI (恒生中國企業指數 ) HSI (恒生指數 ) HSHKCI (恒生香港綜合指數 )

Corporate Governance Performance by Indices 2008

Top 10 Best Performing Companies in 2002 (by alphabetical order)

Company Name Code HSI HSHKCI HSCEI HSCCI

Asia Satellite 1135 ✓Bank of East Asia 0023 ✓ ✓China Mobile 0941 ✓ ✓

CLP Holdings 0002 ✓ ✓HK & S Hotels 0045 ✓HKEx 0388 ✓HSBC Holdings 0005 ✓ ✓Linmark Group 0915 ✓MTR Corporation 0066 ✓ ✓Vtech Holdings 0303 ✓

Top 10 Best Performing Companies in 2008 (by alphabetical order)

Company Name Code HSI HSHKCI HSCEI HSCCI

Bank of China 3988 ✓ ✓

China Resources 0291 ✓ ✓

CLP Holdings 0002 ✓ ✓Hang Lung Group 0010 ✓HKEx 0388 ✓ ✓HSBC Holdings 0005 ✓ ✓ICBC 1398 ✓ ✓

Jiangsu Express 0177 ✓

MTR Corporation 0066 ✓ ✓Sinopec Corp 0386 ✓ ✓

2. HK corporate governance standards with other Asia-pacific marketsMacro Corporate Governance Scorecard* (commissioned by PECC)

Two surveys:

1. First survey is on Rules and Regulations on Corporate Governance• Based on 5 OECD principles

– Rights of shareholders

– Equitable treatment of shareholders

– Role of shareholders

– Disclosure and transparency

– Board responsibilities

* Cheung, Y. L., and H. Jang. 2008 "Scorecard on Corporate governance in East Asia: A comparative study" International Finance Review, 9, 415-460.

Macro Corporate Governance Scorecard

• Research team consists of representatives from each East Asian economies, including China, Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand

• Institute of Directors or Research Institutes• Assistance from the regulatory agency

Macro Corporate Governance Scorecard

2. The second survey is on

• Market perception on corporate governance practice

• Questionnaire distributed by Investment Fund Association

• Fund managers and analysts with investment exposure in the region

Macro Corporate Governance Scorecard

Objectives

• Two different angles

– existing regulatory framework on corporate governance

– Investors perception

Rules and Regulations

• 103 questions

– 55 are used in the scoring

– 48 are used for confirmation

Rules and Regulations

Area of Evaluation

The Rights of Shareholders

Equitable treatment of shareholders

Role of Stakeholders

Disclosure and Transparency

Board Responsibilities

Sum

Number of questions surveyed

39 12 44 20 28 103

Number of questions included in evaluation

16 9 2 15 13 55

Rules and Regulations

Area of Corporate Governance

The Rights of Shareholders

Equitable treatment of shareholders

Role of Stakeholders

Disclosure and Transparency

Board Responsibilities

Sum

Weight 1 30% 10% 5% 15% 40% 100%

Weight 2 20% 20% 10% 20% 30% 100%

Rules and Regulations

Rating result (Weighting 1)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

China Philippines Korea Hong Kong Malaysia Taiwan Indonesia Thailand Singapore

Rules and Regulations

Rating result (Weighting 2)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

China Philippines Korea Thailand Malaysia Indonesia Hong Kong Taiw an Singapore

Investor Perception

Survey

• 10 questions

• 17 fund managers and 8 analysts

• 1 to 5 point scale

Investor Evaluation

1. How do you evaluate overall quality of corporate governance practiced in each county?

2. Shareholder rights are protected.3. Management respects shareholder value.4. Accounting reports including annual and semi-annual reports are

accurate and reliable.5. Disclosures are made timely and adequately.6. Board supervises the management independently and effectively.7. Rules and regulations on corporate governance are enforced effectively.8. The financial intermediaries including accountants and auditors can be

trusted.9. Legal system including courts and prosecutors are fair and independent.10. Foreign investors are equally treated as local investors.

Investor Perception

Score of sum of all 10 questions

0

5

10

15

20

25

30

35

40

45

Sing

apor

e

Hon

gKo

ng

Taiw

an

Kore

a

Thai

land

Mal

aysi

a

Philip

pine

s

Indo

nesi

a

Chi

na

Remarks

• Two surveys yield different results

• REFORM not only in rules and regulations

• ALSO in the implementation and enforcement

Conclusion:

• HK should differentiate our markets from others as an exclusive club for quality listed companies

• To build up the brand name with

– clear regulatory framework

– adequate investor protection

– lower cost of capital

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