DR. LI TAK SUM SHANGHAI HONG KONG DEVELOPMENT LECTURE 2016 Comparing Shanghai and Hong Kong as Financial Centres: Past, Present and Future A n t h o n y N e o h, Q C, S C C h i n e s e U n i v e r s i t y o f H o n g K o n g, 2 5 N o v e m b e r 2 0 1 6 1
Structure of the Lecture Taking Stock: a historical and present comparison. Drivers of development, policy directions. Disrupting forces. Conclusion. 2
A REVERSAL OF HISTORICAL ROLES BETWEEN THE TWO CITIES Hong Kong: China s international window Shanghai: Hub of China s domestic Market. 3
Some comparative Statistics Hong Kong Population: 7. 3 Million GDP (2015): US $ 307 Billion GDP Composition: Services 92.5% Import/Export 22.7% Financial Services 17.6% Public Services 17.4% Householder expenditure as % of GDP (2105): 66 % Just below Shanghai in 2012 OECD Program for International Student Assessment. 9 publicly funded universities. Shanghai Population: 24.15 Million GDP (2015): 2.5 Trillion Yuan GDP Composition: Services 65% (48%) Manufacturing 35% (47) Agric 0% ( 5%) Household expenditure as % of GDP: (58%) Top City in the World : 2012 OECD PISA (best in maths, reading and science among 15 year olds) 10 2011 Universities 4
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Comparative Financial Position Hong Kong Banking Assets (2015): HK $7.5 Trillion. Financial intermediaries from around the world, well versed in Chinese financial system. Currency Board linked to USD and no exchange control. Modern Financial infrastructure with RTGS and linked to Mainland Payment, bond/fx trading network. Main CNH Centre for China. Center for international fx trading, OTC derivative markets and swap markets for HKD, CNH, International stock market connected to Shanghai and Shenzhen. Legal system well accepted around the world. World class financial regulation. Shanghai Banking Assets: Whole Country. Financial intermediaries largely domestic (some internationalising but slowly). Nascent derivatives markets. Currency in managed float and just entered the SDR basket. Modern national financial infrastructure hubbed in Shanghai: CPS, CIPS, CFERTS, Inter-bank bond trading system. Legal system still developing, financial laws, particularly bankruptcy laws require further development. Financial regulation catching up with international standards. Require infusion of human resources. 8
Comparing the Stock Markets 9
Differences in listed companies Pic Source: Google Image 10
Number of Listed Companies As of 24 October 2016 (2016 年 10 月 24 日止 ) HKEX SSE ( 上交所 ) Main Board ( 主板 ) 1693 GEM Board ( 创业板 ) 248 Total: 1941 Main Board ( 主板 ) 1142 SZSE ( 深交所 ) Main Board ( 主板 ) 478 SME ( 中小板 ) 804 ChiNext ( 创业板 ) 546 Total ( 总数 ) 1828 New3rd Board ( 新三板 ) Listed ( 上市 ) 9273 11
Market Capitalization and Place among World Exchanges (as of 15 September 2016) HKEX ( 港交所 ) SSE ( 上交所 ) Market Cap USD 3301 (Bln) Market Cap: USD 3985 (Bln) Place: No. 7 Place No. 4 IPO (2015) US $33.5 Bln (No.1) IPO (2015) US $ 17.6 (Bln) (No. 3) SZSE ( 深交所 ) Market Cap USD 3288 (Bln) Sources: World Federation of Exchanges Monthly Report (Market Cap) E&Y Global IPO Trends (IPO figures). Place No. 8 12
1. Difference in Issuers: Hang Seng Index Weighting HSI Weighting Cosumer Goods, 2% Cosumer Services, 3% Industrials, 0.4% Conglomerates, 5% Utilities, 6% Energy, 7% Financials, 46% Telecom, 8% Properties & Construction, 11% IT, 12% Financials IT Properties & Construction Telecom Energy Utilities Conglomerates Cosumer Services Cosumer Goods Industrials Data Source: Hang Seng Index Sep 2016 Factsheets 13
Hang Seng Index Weighting: Top 10 Financials # Name HSI Weighting 1 HSBC Holdings 10.3% 2 AIA 8.4% 3 CCB 7.3% 4 ICBC 4.6% 5 BOC 3.7% 6 HKEx 3.2% 7 Ping An 2.8% 8 China Life 2.0% 9 Hang Seng Bank 1.4% 10 BOC HK 1.4% As of 25 Oct 2016 Data Source: Hang Seng Index Total 45.0% 14
Hang Seng Index Weighting: CHINA As of 25 Oct 2016 Data Source: Hang Seng Index, Bloomberg # Name HSI Weighting (%) 1 Tencent 10.3 2 CCB 7.3 3 China Mobile 7.3 4 ICBC 4.6 5 Bank of China 3.7 6 Ping An 2.8 7 CNOOC 2.5 8 Sinopec Corp 2.0 9 China Life 2.0 10 PetroChina 1.6 11 BOC Hong Kong 1.4 12 China Overseas 1.3 13 CITIC 0.9 14 China Shenhua 0.7 15 China Res Land 0.7 16 China Unicom 0.7 17 AAC Tech 0.7 18 Bankcomm 0.7 19 Hengan Int'l 0.6 20 Mengniu Dairy 0.6 21 Lenovo Group 0.5 22 Belle Int'l 0.5 23 Want Want China 0.4 24 China Mer Port 0.4 25 China Res Power 0.3 26 Kunlun Energy 0.3 Total/Average 54.5 15
SHCOMP Index Weighting SHCOMP Weighting % Consumer Staples, 4.5 IT, 4.3 Health care, 4.2 Telecom, 0.5 Utilities, 4.8 Financials, 29.2 Real Estate, 5.0 Materials, 8.6 Consumer Discretionary, 9.7 Industrials, 19.3 Energy, 9.9 Financials Industrials Energy Consumer Discretionary Materials Real Estate Utilities Consumer Staples IT Health care Telecom Data Source: Bloomberg 16
SHCOMP Weighting: Top 10 Financials Name SHCOMP Weighting ICBC 4.6% ABC 3.8% BOC 2.9% CHINA LIFE INSURANCE 2.0% Shanghai Pudong Development Bank 1.4% Ping An Insurance 1.4% China Merchants Bank 1.3% Industrial Bank 1.2% Minsheng Bank 1.1% BoCom 0.9% Total 20.4% Data Source: Bloomberg 17
Shenzhen Component Index Weighting Shenzhen Component Index Weighting % Utilities, 2.5 Real Estate, 7.7 Energy, 1.0 Telecom, 0.1 IT, 21.9 Financials, 8.0 Consumer Staples, 8.1 Consumer Discretionary, 16.1 Health Care, 9.9 Materials, 10.1 Industrials, 14.4 IT Consumer Discretionary Industrials Materials Health Care Consumer Staples Financials Real Estate Utilities Energy Telecom Data Source: Bloomberg 18
CHINEXT Index Weighting CHINEXT Index Weighting Consumer Staples, 10.2% Materials, 1.3% Utilities, 0.6% Consumer Discretionary, 12.6% IT, 43.5% Health Care, 13.1% Industrials, 18.7% IT Industrials Health Care Consumer Discretionary Consumer Staples Materials Utilities Data Source: Bloomberg 19
SHENZHEN SME Index Weighting Shenzhen SME Index Weighting Energy, 0.6% Real Estate, 2% Consumer Staples, 8% Materials, 8% IT, 27% Financials, 10% Industrials, 11% Consumer Discretionary, 18% Health Care, 14% IT Consumer Discretionary Health Care Industrials Financials Materials Consumer Staples Real Estate Energy Data Source: Bloomberg 20
Differences in Investors Hong Kong China Mainland Pic Source: Google Image 21
2. Difference in investors: HKEX HKEX: Distribution of cash market trading value by investor type EP Principal Trading, 21.9% Institutional Investors, 50.6% Retail Investors, 27.7% Institutional Investors Retail Investors EP Principal Trading Data Source: HKEX The Cash Market Transaction Survey 2014/15 22
Shanghai Exchange: Distribution of trading value by investor type Shanghai Exchange: Distribution of trading value by investor type Institutional Investor, 11.6% Legal representative, 3.0% Shanghai-HK Stock connect, 0.2% Retail Investor, 85.2% Retail Investor Institutional Investor Legal representative Shanghai-HK Stock connect Data Source: 上海交易所 2015 年鉴 23
Linkages between Markets Hong Kong Shanghai Stock Connect PRC Investors with RMB 0.5 million Hong Kong Investors may buy SSE 380 and 180 Stocks. Daily net buy quota RMB 13 Billion. Hong Kong Shenzhen Stock Connect PRC Investors with RMB 0.5 million may buy/sell Hong Kong HIS, Mid Cap Stocks. Hong Kong Investors may buy/sell SZSE Component Index Stocks, plus Mid Cap and Chinext Stocks of RMB 6 Billion or over market cap. Daily net buy quota of RMB 10.5 Billion. 24
Regulatory Architecture, philosophy and legal system Hong Kong Open international architecture (admit listed companies of many places). Mainland China Market Purely Domestic Mechanism: Only companies registered in Mainland China are allowed to list. Independent regulator with fair/open markets philosophy, and adequate experienced human resources. Robust Securities Law, with strong powers of intervention by regulator. Mature legal system, allowing appeals from actions of regulator to independent judicial bodies and judicial review. Subordinate to the State Council of the People's Republic of China, regulatory authorities are responsible for the economic development and stabilization of society; however, they lack experienced human resources. Securities Law in China is very different from Hong Kong, particularly in the area of the use of provisional measures to protect the market. Investigative powers not strongly backed up by legal sanctions. As the law is still developing, the judiciary is not familiar with the operation of the securities market. The judiciary has to rely much on the professional judgment of regulatory authorities, making it hard to maintain independence in handling administrative, civil and criminal litigation relating to securities market issues. 25
Market Structure Hong Kong Developed cash market and derivative markets internationally open, but no commodities futures markets. Mainland China Market The stock market is now under diversified development (Main board, SME board, GEM, the New3rd Board, Crowd-funding). Financial derivatives market is developing and the Commodities Futures market is under rapid growth. Market is limited to domestic investors with the exceptions of QFII qualified foreign institutional investors. Transparent trading in all markets and legally mandated reporting of cash and derivative markets trading and beneficial long/short positions, including share pledges. Basic transaction in Stock market is transparent; however, the mechanisms for short-selling, derivatives positions and declaration of interest are weak. All public investment activity regulated. Only Public Offerings are regulated. Privately Offered Funds within 200 people are not regulated, indicating the regulation of wealth management products is weak. Central clearing but no central share repository and registration. There exist mechanisms for Central Clearing and registration of Stock accounts. 26 Banking regulations only apply to Commercial Banks and Trust Companies, but not P2P platforms.
Corporate Governance: Differences and common issues Hong Kong Mainland China Market Mature Company Law enforced by mature legal system, including derivative action by shareholders, well trained legal profession and judiciary. As the Company Law is still developing, protection of shareholders is deemed as weak. As many problems are unprecedented in Mainland China, the Judiciary and the legal profession are in the process of learning and efforts have been made to improve the Company Law. Strictly enforced beneficial interest and price sensitive information disclosure system, backed by legislation. The mechanism of disclosing beneficial interest and sensitive stock price information is weak. Only Listing Rules govern the latter. Active independent financial press Official and private financial media have their own agendas and purposes. Active institutional investors. Institutional investors constitute the minority and are an insignificant influence in the market. Corporate Governance practice benchmarked against global best practice, but a large number of companies do not fully comply. Corporate Governance is benchmarked to global best practices but only a small proportion could fully comply. Grappling with market misconduct among controlling shareholders of small listed companies. 27 Regulatory authorities have to expend vast energies getting controlling shareholders of a large number of companies to comply with market rules.
Hong Kong and Shanghai: Comparative positions as International Financial Centers 28
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Changes in the next 10 years in the Financial Markets 34
China s share of Global Financial Assets still small: much room for growth. 35
Internationalisation of the RMB: Key Themes Entry into the SDR and what this means. Financial and External Reforms. Fiscal Reforms Structural Reforms. 36
The SDR Components (as at 1 October 2016): USD 41.73% Euro 30.93% RMB 10.92% JY 8.33% Sterling 8.09% (Based on Amount of currency held as reserves by other central banks who are members of IMF, FX turnover, international banking liabilities and international debt liabilities) 37
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Meaning of joining the SDR Basket RMB will definitely become an international reserve currency. PRC obligated to disclose Components of the Foreign Exchange Reserves (COFER system) PRC already obligated to disclose financial information under the Special Data Dissemination Standards, will go for SDDS Plus. PRC as member of IMF already undertakes IMF Article IV financial stability obligations (which includes financial reforms to maintain stability and surveillance by IMF see IMF Annual Article IV Reports). PBOC will further internationalize RMB (already 33 Swap Agreements, CFETS and CIPS, and Opening of China Bond markets to international banks and IMF members). 42
But myriad reforms needed: Financial sector reforms External sector reforms Much less reliance on credit financing need to develop deeper capital market Fiscal reforms. Structural reforms. 43
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Shadow Banking item Amount (RMB Trillion) Proportion Off balance sheet assets of commercial banks Wealth Management Products 3.59 6.07% 23.50 38.78% Trust Products 16.58 28.07% Mutual Funds 7.95 13.46% PE Funds 6.83 11.56% P2P lending balances 0.62 1.05% Total: 59.07 100% 55
The Bond Market to end of Aug 2016 Type Inter-bank Market Unit: 100 M 414,143.79 Stock Exchange 62,003.89 Total 476,147.68 PwC 56
Composition of Interbank Market 债券类别 I00 M Government Bonds: 202,906.50 - Sovereign 109,320.98 - Muncipal 93,585.52 Policy Bank Bonds 121,689.32 Corporate Bonds 34,668.91 Commercial Banks Bonds (Tier 1) Government supported Airport Bonds 16,033.15 12,125.00 Medium Term Notes 11,996.24 Tier 2 Bank Capital Bonds 7,560.14 ABS 4,271.82 Non-bank Financial Institution Bonds 1,679.00 Central Bank Bonds 1,173.72 Supranational Bonds 40.00 Total: 414,143.79 PwC 57
Composition of Stock Exchange Traded Bonds Type 100M Sovereign Bonds 6,911.86 Muncipal Bonds 1,486.08 Policy Bank Bonds 95 Bonds of Unlisted Companies Listed Companies Bonds 8,867.70 34,557.24 Convertible Bonds 344.84 Convertible Bonds with detachable warrants SME Privately Issued Bonds 68 9,673.17 Total 62,003.89 PwC 58
Bond Market Turnover Jan to Aug 2016 59
Bond Market Turnover Jan Aug 2016 PwC 60
Interbank Market Yield Curve 30 Sept 2016 61
Need to develop capital markets and reform the regulatory structure 62
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The next stage: Fiscal and Structural Reform 65
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Plenty of room for growth: Domestically. Internationally, through OBOR and other initiatives such as AIIB and BRIC Development Bank, with greater roles in World Bank, IMF and ADB. 69
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Financial Development in the next decade in China Improved systemic risk regulation. Improved functional regulation, picking up loop holes. Improved commercial law system. More confidence in allowing financial innovation including a derivatives market commensurate with size of cash market, and a securitised securities market. Growth of Bond and Stock Market in step with GDP growth, by allowing more IPOs and other secondary capital raising. Banks lifting their fee and commission income, lifting their game in FinTech particularly using AI in credit decision making and risk management, using the capital markets more, and engaging in international banking particularly through the OBOR countries. Social Security, Insurance, Pension Funds and other Public Asset Management constructs go global. 87
Hong Kong s Role in the Next Decade Although RMB will internationalize further, there will be capital controls despite liberalisation. Hong Kong remains China s most important window to the Global Financial Markets, particularly in the internationalization of the RMB, particularly in the creation of Swap Markets, infrastructure financing and in introducing financial innovation difficult to achieve in the short term in China. As the World s largest IPO market, Hong Kong will continue to afford Chinese companies wishing global exposure to their capital raising and to those companies not able to go IPO in China (there will be still be long lines for IPO in China and a large number of venture capital companies wishing to go to the capital markets. Hong Kong has a large pool of Professionals and Professional firms which can fill the HR needs of the Chinese Financial System. 88
Disrupting forces: Trade Protectionism. Geopolitical problems (issues with NK, Japan, Asean, China-US Relationship). Social issues giving rise to internal social stability. Health issues. Cyber-security over-complexity of systems. (To Hong Kong FTZ duplicating some of Hong Kong s functions) 89
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Conclusion: Hong Kong s financial future is led by China s development; Will in the next decade continue to play an important and indispensible role as China s window to the international markets. Hong Kong must develop human resources, skills to navigate the markets in China, the region and globally. 92
Comments Welcomed tonyneoh@gmail.com 93