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This year marks the 20th anniversary of H share listings in Hong Kong and we have kicked off a series of events to commemorate this major milestone. While two decades have passed since Tsingtao Brewery became the first H share company to list, we are still enjoying the fruits of the H share regime today. As history is a good guide to the future, I’d like to share some thoughts with you about the past, the present and the future of Hong Kong’s capital market.
Nowadays we take H share listings, or in a broader sense, Mainland company listings in Hong Kong, for granted. After all, Mainland companies including H shares have accounted for around two-thirds of our turnover since 2007 and are already an integral part of our capital market. Without H shares, Hong Kong would not be the top-tier global financial market it is today. H share listings have drawn international investors looking to tap China’s growth, and that in turn has attracted international issuers from around the world and abundant financial talent to our city. But few remember the magnitude of the obstacles that were faced when establishing the H share listing regime 20 years ago.
Let’s step back to those days for a moment. In 1993, China was still very much a planned economy. There were few private enterprises and the concept of modern corporate governance was still new to Mainland China; the domestic capital market had just started with no securities enforcement to speak of. To put it simply, the basic building blocks for a functioning capital market did not exist. So when suggestions were made for Chinese companies to float shares in Hong Kong, there was a lot of skepticism. China was a square pipe and Hong Kong a round pipe, and there didn’t seem to be a way to get them to connect.
However, for both sides the opportunity was too big to ignore. China was accelerating its "Open Door" policy and its enterprises, especially state-owned ones (SOEs), eagerly sought capital from overseas. Hong Kong was in the right place and had the right tools to capitalise on this opportunity with its mature capital market, proximity to the Mainland both culturally and geographically, and investor confidence in its system. But how could the square pipe be connected to the round one? Hong Kong, at this critical juncture, proved its innovative and enterprising spirit by developing the right solution at the right time. It teamed up with the Mainland to build the H share regime, whereby the existing Hong Kong Listing Rules were reinforced by the addition of a special chapter applying only to China enterprises. The H share regime was the "adaptor" that connected the square pipe with the round pipe.
This solution was not without risk or controversy. One major debate was over whether Mainland companies should comply with the higher standards of Hong Kong’s Main Board listing rules or whether they should list on a separate board with lower standards. The leaders of both sides at the time agreed that Mainland companies were aiming to join the international market and they’d better play by the highest-standard rules from day one. It took vision and courage to make the right decision – and that set off a wave of Mainland company listings in Hong Kong and drove the long-term prosperity of the Hong Kong market. In return, Hong Kong contributed to the Mainland’s successful transformation towards a market economy.
Today, a large proportion of big SOEs have already come to Hong Kong and Mainland listings are becoming a mature story. Some people are even concerned the stream of H shares will run dry. I am optimistic for two reasons. Firstly, the pipeline of H share companies remains strong, with the recent relaxation of CSRC criteria for allowing domestic companies to list in Hong Kong, and the conversion of Mainland B shares to H shares. Secondly, more significant growth will come from the floating of more shares of existing H share companies. Currently, the majority of the shares of H share companies are held by government authorities. Combined, these shares are worth trillions, and we expect them to be released gradually. When that happens, it will significantly uplift the size and liquidity of our market.
Apart from the above "incremental growth" from the existing H share regime, Hong Kong is facing yet another historic opportunity which will likely drive its growth in the next decade. But tapping that growth will mean making tough decisions, just as our predecessors did 20 years ago.
In order to understand this new opportunity, we have to look at what’s changed – and what hasn’t – since 1993.
What’s the same? The Mainland’s desire and need to open up to international markets remain strong. With its trade and economy more globally integrated, its need for an open capital market and financial sector is greater than ever. At the same time, thanks to the "one-country, two-systems" policy, Hong Kong maintains its edge in financial markets, system and international access. In short, Hong Kong is still highly and uniquely relevant to Mainland China.
What’s different? China has evolved from "capital hungry" to "capital abundant", hence it is transforming from a capital importer to a capital exporter. In addition to providing Mainland issuers with access to international capital, Hong Kong’s future role is to provide Mainland investors with access to international issuers and products and provide international investors with access to onshore Mainland issuers and products.
Can Hong Kong make this change and meet the Mainland’s needs? Can we adapt to this new development and equip ourselves with necessary infrastructure, system and talent? I remain confident. I believe in Hong Kong people’s capacity to innovate and take bold steps. With these characteristics, Hong Kong will be able to continue to reinvent itself.
Our predecessors took the chance 20 years ago and succeeded. Now it’s our turn. Let’s work together to create a new regime that can connect the Hong Kong and Mainland markets and achieve another 20 years of prosperity. I’ll share more thoughts on that in the coming months.
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