and beyond - HKEx’s perspective Paul Chow Chief Executive, Hong Kong Exchanges and Clearing Ltd Presentation at Economic Summit December 2003

2 HKEx has recently completed a strategic planning exercise To implement the Strategic Plan, we will need the support of our stakeholders and market players like you. This presentation highlights the vision, directions and key strategies of HKEx in the next 3 years A special focus will be given to our strategies in China development, market infrastructures and investor protection and beyond - HKEx’s perspective

3 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

4 1. HKEx’s roles Maintain an open, secure, fair, orderly and transparent marketplace contributing to HK’s status as an international financial centre and premier capital market for China Front-line regulator of issuers Regulator of participants’ compliance with HKEx’s trading and clearing rules Operator of market infrastructures For-profit company Offer listing, trading, clearing & settlement and information services Public organisation Regulator Business entity HKEx is a complex institution with at least 3 distinct roles

5 1. HKEx’s role (cont’d) HKEx has many stakeholders Suppliers Data vendors SFC/ Government Brokers Investors Issuers Investment advisers /professionals Shareholders Banks Staff

6 1. HKEx’s roles (cont’d) In pursuing long-term success, HKEx has to balance its three roles and work closely with its stakeholders. There are various check and balance measures to avoid conflicts of interest. Business Public Regulatory Check & Balance

7 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

8 2. HKEx’s vision Operate a quality market Focus on Mainland China and Hong Kong business An independent exchange based in Hong Kong seeking closer cooperation with China counterparts Focus on core market operations, including securities and derivatives trading, clearing, settlement and depository, information services as well as regulation General Geography Status Business scope Goals

9 2. HKEx’s vision The mission of HKEx is to operate a world-class marketplace for Hong Kong and Mainland China securities and derivatives products. By offering issuers access to international capital markets and maintaining an open, secure, fair, orderly, efficient and transparent marketplace, HKEx contributes to Hong Kong’s status as an international financial centre and the premier capital market for China. By servicing China’s substantial long-term demand for capital and exchange services in accordance with international standards and practices, HKEx has the potential to become one of the world’s pre- eminent exchanges. Mission statement

10 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

11 3. Direction & Strategies A gateway for international players to access China Become one of the world’s larger exchanges with international standards and practices Global positioning Goals International gateway for Mainland issuers and (when possible) investors Become a domestic Mainland player in the long run China positioning

12 Building a quality market Becoming a Mainland Partner Consolidation Cost rationalisation Prioritise projects & st reamline internal processes Strengthen staff team Strengthen risk management Strengthen regulatory regime Foster corporate governance culture Improve market infrastructures Increase market liquidity Raise customer satisfaction & investors’ confidence Improve investor education/information dissemination. Expand China offerings Solicit Mainland investors (when permitted) Venture into Mainland domestic business HKEx will base its success on three building blocks Time 3. Direction & Strategies (cont’d)

13 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China development 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

14 4.Key initiatives - China development Achievements of the past decade The largest offshore listing and trading centre for China stocks A total of 254 Mainland companies, including H share, red chip and private enterprises, have been listed on HKEx. Their total market capitalisation as at Nov 2003 was HK$1,518 billion Over HK$754 billion was raised by Mainland companies via IPO and post-listing fund raising Seven out of eight largest IPO (capital raised > HK$10 bil) were Mainland companies Trading of China stocks reached HK$864 billion, representing over 43% of total equity turnover

15 4.Key initiatives - China development (cont’d)

16 4.Key initiatives - China development (cont’d) Turnover of China stocks fluctuates from time to time. This year, H shares and red chip companies alone have contributed over 40% of total equity turnover. Their aggregate weighting in Hong Kong’s total market capitalisation is also large.

17 4.Key initiatives - China development (cont’d) Benefits for Hong Kong Diversifying the portfolio of Hong Kong listed companies Improving market width and depth Creating a unique selling point to global player Developing a sophisticated domestic pool of China market experts Becoming the information hub for China market China listing in Hong Kong has created a win-win situation Benefits for Mainland China Raising international capital to support its rapid economic growth Speeding up enterprise reform, quality management and corporate governance in China Facilitating the development of China’s capital market Offering exposure to international standards and market practices

18 4.Key initiatives - China business (cont’d) Our vision China, being a very large and developing economy, has vast long term demand for capital and exchange services Such demand cannot be fully met domestically As long as Hong Kong can maintain its quality advantage in the context of the Mainland market opening process, it can grow to a large scale in both cash and derivatives markets Goals Continue existing successful business on issuer side When regulation permits, Hong Kong can serve Mainland investors and intermediaries too Gradual opening of Mainland market under WTO and CEPA will provide opportunities for HKEx’s further involvement in Mainland business (in particular, Pearl River Delta region) In the next 3 years, HKEx will continue to improve its services to Mainland and seek new business opportunities there

19 4.Key initiatives - China business (cont’d) Attract more major, high quality Mainland enterprises Enhance listing services to Mainland issuers Develop China-related products (e.g. H share index futures/options) Explore crude oil contract with Shanghai Futures Exchange Explore cooperation with Shenzhen Stock Exchange Promote HKEx’s business on the Mainland When permitted, facilitate Mainland investors’ access to HK Explore possibility of allowing Mainland EPs’ access to HK China listing China products Marketing & others Cooperation

20 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China development 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

21 5. Key initiatives - Market infrastructures Launch of AMS Launch of off-floor trading system Launch of AMS/3 Launch of HKATS Abolition of Trading Floor Migration of stock options trading to HKATS HKATS upgrade (OMex 17.1) Launch of CCASS CCASS/3 A critical factor of Hong Kong’s success is the offering of efficient, secure and reliable market infrastructures. Cash Derivatives Clearing

22 5. Key initiatives - Market infrastructures (cont’d) Ensure that market infrastructures and operations meet international standards Offer secure, reliable, efficient and high quality market infrastructures Increase operational efficiency and reduce operating costs Launch of DCASS Harmonise and where appropriate, consolidate derivatives clearing operations Increase immobalisation of securities in HKSCC Depository Strengthen the reliability, security and availability of market systems Explore the potential and market impacts of a scripless market Introduce Enhanced CCASS Investor Participant Account services Explore the possibility of network consolidation (i.e. AMS/3, CCASS/3, HKATS and Market Data Feed) to seek cost reduction without sacrificing serviceability and manageability In the next 3 years, HKEx will continue to ensure that our market infrastructures meet the demands of our customers and the changing marketplace Network Market System Policy

23 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China development 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

24 6. Key initiatives - Investor protection Improve the listing regulatory structure based upon the outcome of the Government review Revamp the Listing Committee’s role in decision-making and related structures Improve disciplinary process Promote the statutory backing for selected Listing Rules Further develop corporate governance Review initial listing criteria and continuing obligations Consider delisting mechanism Regulate sponsors and IFAs Investor confidence is vital for the success of HKEx markets. In the next three years, HKEx will take action to enhance the current structure, policy and operations to boost investor confidence Structure Policy

25 6. Key initiatives - Investor protection (cont’d) Practice Review and improve enforcement process Improve efficiency of listing application and IPO vetting process Increase transparency of Listing Unit’s operations Improve investor education Further improve Listing Unit’s staff quality and service culture Seek to improve directors’ understanding of Listing Rules and regulatory requirements Foster closer working relationship with other regulatory bodies

26 Agenda 1. HKEx’s roles 2. HKEx’s vision 3. Direction and strategies 4. Key initiative - China development 5. Key initiative - Market infrastructures 6. Key initiative - Investor protection 7. Conclusion

27 7. Conclusion The rapid growth of China’s economy and its opening will create new opportunities for Hong Kong securities and derivatives industry HKEx’s future success will be built on three building blocks: consolidation, building a quality market and becoming a Mainland Partner Expansion of our Mainland business, improvement of our market infrastructures and the strengthening of investor confidence will be the key to the accomplishment of our goals.

28 THANK YOU !