Institutional investors in the Hong Kong securities market Paul M Y Chow Chief Executive, HKEx Presentation to the Hong Kong Retirement Schemes Association 2 March 2005

2 Overview of the Hong Kong securities market Institutional Investor Profile - Overall Local institutional investor profile Overseas institutional investor profile Regulatory/infrastructure developments affecting institutional investors Business developments affecting institutional investors China Dimension Agenda

3 Overview of the Hong Kong securities market Hong Kong stock market is 16 times its size in 1986

4 Overview of the Hong Kong securities market Hong Kong was third in equity funds raised in 2004 RankExchangeEquity Funds Raised (US$ billion) 1New York Spain39.6 3Hong Kong35.4 4London33.4 5Toronto30.5 6Euronext26.8 7Tokyo25.8 8Australia25.6 9Nasdaq14.7 Others -Shanghai5.7 -Shenzhen2.9 Source: Provisional figures (Jan-Dec 04) World Federation of Exchanges (not include exchanges for which statistics are not available). Includes capital raised by issuers cross-listed on other exchanges; i.e. double counting involved WFE monthly statistics report available up to 14 Feb 2005

5 Overview of the Hong Kong securities market Cash market (Main board & GEM) as at end of 2004 Global ranking by market capitalisation: 9th No. of listed companies: 1,096 No. of newly listed companies (2004) : 70 Market capitalisation: HK$6,696 billion Turnover value: HK$3,974 billion Funds raised by IPO: HK$97.2 billion Total equities funds raised: HK$281.4 billion Products: equity, warrants, ELI, unit trusts and debt securities

6 Overview of the Hong Kong securities market Hong Kong derivatives market has increased 24 times since 1986

7 Overview of the Hong Kong securities market Derivatives market (as at end of 2004) Global ranking by turnover: 35 th Total turnover: 19,629,692 contracts (  35% compared to 2003) Hang Seng Index futures: 8,601,559 contracts Products: futures and options on stocks, stock indices and interest rates

8 Source: Cash Market Transaction Survey 2003/2004, HKEx Institutional Investor Profile - Overall Institutional investor is the largest contributor to stock market turnover, except in 1997 and 2000

9 Source: Derivatives Market Transaction Survey 2003/2004, HKEx Institutional investors also actively participated in the Hong Kong derivatives market Institutional Investor Profile - Overall

10 Source: Cash Market Transaction Survey 2003/2004, HKEx Trading value of institutional investors in the stock market continued to rise over the years Institutional Investor Profile - Overall

11 Source: Derivatives Market Transaction Survey 2003/2004, HKEx Trading volume of institutional investors in the derivatives market also increased over the years. Institutional Investor Profile - Overall

12 Institutional Investor Profile - Overall Key players of the Hong Kong securities market Key players of the Hong Kong derivatives market Trading activities continued to expand over the years

13 Local Institutional Investor Profile Local institutional investors contributed 23% and 10% of trading in cash and derivatives markets

14 Local Institutional Investor Profile

15 Local Institutional Investor Profile Source: Derivatives Market Transaction Survey 2003/2004, HKEx

16 Local institutional investor profile Total: 1.7 million contracts

17 Major contribution to capital raised Important contributors to cash market turnover (23%) Smaller contribution to derivatives market turnover (10%) Local fund managers are happy with the followings –China potential –Main Board corporate governance and disclosure –Listed company regulation And they have concerns about GEM & Mainland companies Local institutional investor profile

18 Overseas Institutional Investor Profile Overseas institutional investors contributed 33% and 22% of trading in cash and derivatives markets

19 Overseas Institutional Investor Profile

20 Overseas Institutional Investor Profile

21 Overseas institutional investor profile Total: 3.6 million contracts

22 Source: Cash and Derivatives Market Transaction Surveys 2003/2004, HKEx Institutional investors mostly come from Europe, UK and US Overseas Institutional Investor Profile

23 Major contribution to cash market turnover (33%) Major contribution to derivatives market turnover (22%) Major contribution to equity capital raised Overseas institutions contribute more trading value than local institutions in both the Hong Kong cash and derivatives markets However their investment decisions, particularly in IPO subscription, are often influenced by local institutions. This is especially true for those overseas institutions with Hong Kong branches. Overseas institutional orders mainly came from the US, United Kingdom and the rest of Europe. Overseas institutional investor profile

24 Strengthening corporate governance regime Issuer disclosure (website archives) Regulation of sponsors and IFAs Listing Rules enforcement (dual filing, statutory backing) Proposed regulatory regime for accountants (Independent Investigation Board and Financial Reporting Review Panel) Narrowing of trading spreads Review of position limits of derivatives products Transition to scripless market CCASS Fees review AMS/3, HKATS and DCASS capacity upgrade Introduction of corporate actions database / electronic voting Review of risk management regime Market network consolidation Regulatory/infrastructure developments affecting institutional investors Regulation Trading / Clearing Fund managers play a crucial role in the pursuit of a quality market. In particular, your role in enhancing issuer quality via scrutiny and corporate voting.

25 Strengthen HKEx business presence via our offices in Beijing, Guangdong and Shanghai Attract listings of Mainland enterprises and HK/overseas companies with Mainland business operations Support the continuous liberalisation of the Mainland investment market H shares index futures and options A50 China Tracker (listed on 18 Nov 2004) Callable Bull and Bear Certificates FTSE / Xinhua China 25 futures and options Business developments affecting institutional investors China New products China dimension remains the focal point of business development in the Hong Kong securities and derivatives market.

26 China dimension No discussion on HKEx and its marketplaces will be complete without a review of its China dimension. HKEx currently facilitates capital formation in Mainland China and provides local and global investors with a fair, secure, efficient and transparent access to invest in quality China enterprises. We look forward to the opportunities in the future to service the many investors, retail and institutions, in the Mainland.

27 China dimension

28 China dimension

29 China dimension

30 China dimension Since 1993 Funds Raised at IPO (HK$mil) Market Capitalisation (HK$mil) 1China Unicom Ltd22/6/ , , China Mobile (Hong Kong) Ltd (formerly China Telecom (HK) Ltd)23/10/ , , China Life Insurance Co Ltd - H Shares18/12/ , , China Petroleum & Chemical Corporation - H Shares19/10/ , , PetroChina Co Ltd - H Shares7/4/ , , BOC Hong Kong (Holdings) Ltd25/7/ , , Ping An Insurance (Group) Co of China Ltd24/6/ , , Semiconductor Manufacturing International Corporation18/3/ , , China Telecom Corporation Ltd - H Shares15/11/ , , CNOOC Ltd28/2/ , , The Ten largest IPOs of Hong Kong

31 China dimension China related companies (including H shares, red chips and Non-H share Mainland private enterprises) are increasingly attracted to seek listing on HKEx’s Main Board and GEM. They now represent: 28% of total number of listed companies (as at 31 Jan 2005) 30% of market capitalisation (as at 31 Jan 2005) 32.1% of total equity funds raised for % of IPO funds raised for % of total turnover value for 2004 More importantly, trading activities of these China related companies stay with Hong Kong. Hong Kong has an average of 80% and 99% of market share in the trading of China stocks dually listed in US and London respectively.

32 China dimension As at end of December 2004Hong KongShanghaiShenzhen Number of listed companies1, Total market capitalisation # (HK$Bil)6, Total equity turnover for 2004 (HK$Bil)3,4232,4881,491 Average P/E ratio (times)* Source: Websites of HKEx, SZSE and SSE # HKEx figure covers both Mainboard and GEM. The figures for Shanghai and Shenzhen refer to total negotiable capitalisation of both A and B share markets * P/E ratio: HKEx - main board, Shanghai and Shenzhen - A share market Exchange rate (31 Dec 2004) RMB1 = HK$ Key market statistics of Hong Kong, Shanghai and Shenzhen

33 Mainland institutional investor profile China dimension Mainland institutional investor profile

34 Major institutional investor types: –securities investment funds –securities firms (proprietary trading and asset management) –insurance companies –trust and investment companies –privately-offered funds –Qualified Foreign Institutional Investors (QFII) –National Social Security Fund (NSSF) –Others (e.g. enterprise pension funds) Different institutional investors are under the jurisdiction of different regulators and regulatory regimes. Estimated aggregate investment in the Mainland’s tradable stocks and government bonds exceeds HK$500 billion, around one-third of total market value. Investment channels and vehicles still subject to quotas and other restrictions China dimension Mainland institutional investor profile

35 Recent developments of Mainland institutional investors Market entry of QFII (mid 2003) Qualified insurance companies allowed to apply certain portion of their foreign exchange balance in overseas investment assets (Aug 2004) Insurance companies allowed to directly invest in the domestic stock market (Oct 2004) Regulatory regime governing enterprise pension funds’ investment established (Feb 2005) Qualified Domestic Institutional Investor (QDII) (for overseas investment by domestic investment funds) under study Overseas investment channel for NSSF under study China dimension

36 THANK YOU