How Mainland Listings Changed the Landscape of the Hong Kong Securities Market China and Global Capital Markets: Conference 2006 Paul Chow Chief Executive HKEx 12 May 2006

2 Introduction The listing of Mainland enterprises has played an important role in the evolution of the Hong Kong securities market in 4 key areas: 1. Listing Regulatory Framework 2. Strengthening our Position as China’s International Financial Centre 3. Broadening the Types of Mainland Related Products 4. HKEx Organisation

3 Agenda 1.Listing Regulatory Framework 2.Strengthening our Position as China’s International Financial Centre 3.Broadening the Types of Mainland Related Products 4.HKEx Organisation

4 A three-tier system regulates the securities market in Hong Kong Policy maker and legislator Sets overall policy direction Initiates legislation Government SFC HKEx Statutory regulator Administers the SFO and guidelines and codes related to: –Market conduct –Disclosure of Interests –Licensing of financial intermediaries (including corporate finance advisers) –Takeover, merger and share buybacks Regulates SEHK pursuant to the SFO and various MOUs Regulates listed issuers through the dual filing regime Frontline regulator Sole operator of the exchange-based stock and futures markets, and central clearing houses Administers the Listing Rules, Trading Rules & Clearing Rules Regulated by the SFC pursuant to the SFO and various MOUs

5 Mainland listings prompted some key regulatory developments in the 1990s Listing of Red Chips in HK 1980s June, 1993 The first H Share listed in HK Mandatory Provisions 《必備條款》 Listing Rules amended to require the articles of associations of PRC issuers to include the new Mandatory Provisions for Companies Listing Overseas 《到境外上市公司章程必備條款》 issued by the State Council Securities Policy Committee and the State Commission for Restructuring the Economic System Nov, 1994 Five Parties’ MOU of Regulatory Cooperation The CSRC, Shanghai Stock Exchange, the Shenzhen Stock Exchange, the SFC and the SEHK signed the Memorandum of Regulatory Cooperation in Beijing Renminbi denominated shares & reconciliation of accounts Introduced Chapter 19A and Appendix 13D to the Listing Rules to –enable listing of Renminbi denominated shares (H shares) –require the financial reports of H-Share companies to reconcile with the Hong Kong requirements HKEx-participated initiatives

6 Since 2000, major regulatory initiatives were implemented to further improve market quality Apr 2003 Mar 2004 Jan 2005 Enactment of SFO SFO consolidated and modernised 10 previous ordinances regulating the securities and futures market Initial Listing Criteria and Continuing Obligations Listing Rules amended on : Track record period (profit / market capitalisation) requirements Public float requirements Financial reporting obligations Definitions and tests in connected and notifiable transactions Corporate Governance matters: Listing Rules amended to adopt the Code of Corporate Governance Practices Introduced “Code vs Recommended Best Practice” system Require issuers to include Corporate Governance Reports in annual reports Apr 2001 Acceptance of IAS and USGAPP Listing Rules amended to accept IAS and US GAPP May 2001 H Share’s Trading Currency Listing Rules amended to allow H Shares to be subscribed for and traded in currencies other than HKD HKFRS harmonised with IFRS HKEx-participated initiatives

7 Agenda 1.Listing Regulatory Framework 2.Strengthening our Position as China’s International Financial Centre 3.Broadening the Types of Mainland Related Products 4.HKEx Organisation

8 Mainland listings make their mark 1980’s Listing of Red Chips H shares listed (Total fund raised: HKD 8.142bn) H shares listed by end of 1994 April 30, Mainland enterprises listed + over 250 MOEs More POEs joined the market 2000 Mainland enterprises listed on GEM Listing of mainly large SOEs; selected by Mainland govt All sizes of SOEs + POEs SOEs: State-owned Enterprises POEs: Privately-owned Enterprises MOEs: Mainland-operating Enterprises

9 Mainland listings have broadened the industry composition of the listed companies in Hong Kong Source: HKEx Iron / Steel manufacturing Automobile manufacturing Ship building Oil and gas; Water treatment plant; Satellite telecommunication operator Gas pipelines constructor Copper mining Toll roads More banks More insurance companies Production of grape wine / spirits Supermarket operator Gold mining Dairy products Ports Coal Mining Airport 2005

10 Mainland enterprises listed in Hong Kong have grown in number and significance Market Total 1996 end of Dec (% of total) 2006 end of Apr (% of total) Increase over the period Number of Listed Companies5831,143 Mainland Companies64 (11%)344 (30%)438% Market Cap (HK$ billion)3,4769,758 Mainland Companies295 (8.5%)4,053 (42%)1,274%

11 RankCompany Listing dateType Fund raised (HK$mn) 1China Construction Bank27 Oct 2005H share71,578 2China Unicom22 Jun 2000Red Chip43,608 3China Mobile23 Oct 1997Red Chip32,665 4China Life18 Dec 2003H share26,714 5Sinopec19 Oct 2000H share26,681 6China Shenhua Energy15 Jun 2005H share22,976 7PetroChina7 Apr 2000H share22,330 8BOC Hong Kong25 Jul 2002Red Chip20,516 9Bank of Communications23 Jun 2005H share16,835 10Ping An Insurance24 Jun 2004Red Chip14,337 Source: HKEx Top IPOs are all by Mainland enterprises Top 10 listed companies by market cap as at Apr 06

IPO 1996 Post IPO 1996 IPO 2005 Post IPO 2005 Non-Mainland Enterprises Mainland Enterprises Hong Kong has become a major capital formation centre for both Mainland and non-Mainland enterprises 1996 (HK$ bil) 2005 (HK$ bil) IPO fund raised – Mainland enterprises (  1,369%) IPO fund raised – Non-Mainland enterprises 2115 (  29%) Post-IPO fund raised – Mainland enterprises 1747 (  185%) Post-IPO fund raised – Non- Mainland enterprises 5288 (  69%) Total fund raised by Mainland enterprises (  636%) Source: HKEx Fund raised (HK$ bil) % 76% 91% 35% 65% 9% 24% 33% 9%

13 - 5,000 10,000 15,000 20,000 25,000 30,000 35, Jan-Apr 2006 Daily DW Turnover of Non-ME Daily DW Turnover of ME Daily equity Turnover of Non-ME Daily equity Turnover of ME Shares of Mainland enterprises are traded actively 1996 (HK$ mn) 2005 (HK$ mn) Jan – Apr 2006 (HK$ mn) Daily DW turnover of Non-ME 4542,752 (  505%) 4,130 (  50%) Daily DW turnover of ME (  1663%) 2,311 (  173%) Daily equity turnover of Non- ME 4,5247,907 (  75%) 11,222 (  42%) Daily equity turnover of ME 6456,708 (  940%) 14,965 (  123%) Daily total market turnover 5,67218,211 (  221%) 32,627 (  79%) Source: HKEx 11% Daily Turnover (HK$ mn) 80% 8% 37% 43% 15% 5% 46% 34% 13% 7% 0.8%

14 Agenda 1.Listing Regulatory Framework 2.Strengthening our Position as China’s International Financial Centre 3.Broadening the Types of Mainland Related Products 4.HKEx Organisation

15 Mainland-related derivatives products were offered to investors 2005 FTSE/Xinhua China 25 Futures and Options launched 2003 H-share Index Futures launched 2004 H-share Index Options launched iShares FTSE/ Xinhua A50 China Tracker launched 1994 Stock options, futures & warrants for individual Mainland enterprises developed Source: HKEx

16 These products are actively traded Source: HKEx 43,683 45,018 59,011 79, ,573 OptionsFY05Jan- Apr 06 Hang Seng Index options12%9% H-share Index options1% Stock options (43 series) Mainland enterprises (21 series) 13%19% Others (22 series)21%22% Other options<0.5% Average daily no. of contracts 155,345 45% 55% 44% 56% 44% 56% 39% 61% 47% 53% 52% 48% FuturesFY05Jan- Apr 06 Hang Seng Index futures39%31% H-share Index futures8%12% Mini HSI futures6%5% Other futures<0.5% Other options include Mini Hang Seng Index options, FTSE/Xinhua China 25 Index options Other futures: FTSE/Xinhua China 25 Index futures, stock futures, 1&3-month Hibor futures and 3-year Exchange Fund Note futures - 20,000 40,000 60,000 80, , , , , , Jan - Apr 2006 Options Futures

17 Agenda 1.Listing Regulatory Framework 2.Strengthening our Position as China’s International Financial Centre 3.Broadening the Types of Mainland Related Products 4.HKEx Organisation

18 HKEx has enhanced its organisation to further improve its partnership with the Mainland 1.Established the Business Development Division (formerly the China Development and Listing Promotion Department), responsible for promoting new listings in Hong Kong through conducting conferences and meetings with prospective issuers a.Set up the Beijing Representative Office in 2003 b.Appointed Special Representatives to station in Guangzhou and Shanghai in Formed the China Affairs Team in the Listing Division in January 2006 a.Liaise with the Mainland authorities and exchanges b.Coordinate regular training seminars and workshops for Hong Kong-listed Mainland enterprises

19 Conclusion: Hong Kong is now China’s international financial centre More international funds, more trading activities An International Financial Venue In the 70’s & 80’s, the market was dominated by British hongs and local companies Hong Kong market - becomes more international as we attract more international funds with the listing of Mainland enterprises Mainland enterprises - listing in Hong Kong helps Mainland enterprises to move towards international standards Market grew rapidly with the listing of Mainland enterprises HK Market HK + Mainland Listings In view of our market quality and to capitalize on the high growth of Mainland economy, we expect that more international investors would be attracted to invest in our market

20 Conclusion: To be successful over the long term, HKEx is committed to continuously enhancing market quality Market Quality Market Quality Investor Confidence Investor Confidence Order Flow Order Flow Market Liquidity Market Liquidity an open, secure, fair, orderly, efficient and transparent marketplace

21 Thank You