‘In Beijing University alone, students are setting up 100 companies a month. Some will be successful and will need money sooner or later and there may be millions more companies to follow. The market is set to be huge.’ For Lawrence Fok, stock exchange CEO and deputy COO of Hong Kong Exchanges (HKEx), the future’s bright. Beyond his plush offices in Hong Kong’s Central district, barges, container vessels and ferries jostle in the choppy waters of the harbor. Inside, the company formed last March by the merger of the Stock Exchange of Hong Kong, Hong Kong Futures Exchange and Hong Kong Securities Clearing Company busies itself with running one of the world’s most volatile equity markets.
It’s been a hectic year for Lawrence Fok – not just because of the merger in March and HKEx’s IPO last June. There’s also been the small matter of running the largest Asian stock market outside Japan, while trying to steer a smooth course through market turbulence at the tech-dominated Gem (the Growth and Enterprise Market). And don’t forget the global exchange merger merry-go-round of last year, either.
As Europe’s markets consolidated, HKEx was invited to become a member of the NYSE-led global equity market (confusingly, also known as Gem, see Crystal ball gazing). ‘We are still in discussions and are looking at which model should be used,’ is Fok’s take on the current situation. Nor is he unduly worried by the rising popularity of electronic communication networks (ECNs). ‘This exchange is a big ECN. We have never used market makers or specialists, and we are not that different from an ECN, except that we are a very transparent ECN.’
Clear & transparent
Fok would plainly like to see that level of transparency replicated among Hong Kong-listed companies – not generally renowned for their openness. Until recently, they could satisfy disclosure requirements simply by publishing their results in one English-language and one Chinese-language newspaper. Regulation is the domain of the Securities and Futures Commission, but HKEx is taking its own steps to improve governance.
‘Corporate governance is very important,’ Fok assures. ‘Back in the early 1990s, we looked at corporate governance and found that better governance would be good for the market, so we started introducing requirements for independent non-executive directors and produced a code of corporate governance for directors,’ he explains.
All very laudable, but Asian investors would claim that it took until the 1997 financial crisis for many major firms to realize the importance of good governance. Fok acknowledges there is still a long way to go. ‘In Hong Kong you cannot take all this in one step,’ he says, referring to the gradual adoption of global governance norms. ‘We are not going to penalize companies that do not meet the requirements, because a code is not a law. But we have been pretty successful as the substantial majority of companies have no problems complying with the code. They have adopted it as a norm,’ he explains.
Now the government has got involved, establishing a working group to examine governance in Hong Kong. ‘Companies that make good governance a priority will find it cheaper to raise money, which is a good incentive,’ says Fok. ‘Corporate governance procedures must be adjusted to each economy and system, and they must keep international investors happy because this place attracts money from all over the world.’
Most companies on the Hong Kong markets still have single controlling shareholders, a factor that some claim is holding back progress in governance. But according to Fok, this should change as family-run firms are passed down to later generations. ‘In Hong Kong most big listed companies have only been on the market for perhaps 30 years and a number are still run by the founder. I would look about two or three generations down the line, because the new generations will have different views and the shareholder structure should be more dispersed.’
Index issues
The large number of Hong Kong-listed companies with controlling shareholders means that the market’s free float is low. Now that MSCI is readjusting its global benchmark indices to take account of free float, this could trigger an outflow of $21 bn from the Asian markets. But if Fok is worried about this move, he doesn’t show it. ‘It’s up to them. We do not intend to influence the index compiler. Our role is to provide an arena for people to trade and provide good capital raising facilities.’
Capital raising is definitely one of HKEx’s strengths. As Fok notes, around HK$430 bn (US$55 bn) was raised during 1993-1999 in Hong Kong. Thanks to its ‘one country, two systems’ relationship with China, Hong Kong still accounts for 84 percent of all capital raising by mainland firms and 80 percent of all Chinese trading. Recent moves by Shanghai’s bourse to merge with Shenzhen’s and launch a junior market to compete with Hong Kong’s Gem does not worry HKEx. Fok is adamant that Hong Kong and Shanghai are not in competition. ‘The size of the pie of mainland Chinese companies is so large that it can accommodate both of us comfortably,’ he claims. ‘There are always more companies waiting to list here than can list; there is always a queue. It’s a win-win situation.’ Despite the supply of new companies, Gem firms have endured a rough ride of late. The dot-com dominated market celebrated its first birthday in November, but it wasn’t a very happy first year: the market fell back from its base level of 1,000 points to settle at around 340. Fok would rather accentuate the positives: ‘A stock exchange should enable companies to raise capital and on that front we have done quite well, raising $1.8 bn in the first nine months of 2000. Gem is second only to Seoul’s Kosdaq market, which raised $2 bn.’
Sniper fire
But that hasn’t stopped the critics from sniping that Gem’s relaxed listing rules have led to violations of shareholder rights. Among the skeptics is the European Commission, which published a report last October criticizing the exemptions granted to tom.com, an internet firm that listed early last year with local tycoon Li Ka-shing as its controlling shareholder. The EC report concludes that if allegations of favoritism towards the Li family are proved, then European businesses may become wary of operating in Hong Kong. The EC’s claims have been strenuously denied by the Hong Kong authorities, but they only serve to intensify the debate over Gem.
For Fok, companies wishing to join Gem need less strict listing requirements. ‘We started Gem because the main board requires companies to have three years profit trading record before listing. That is clearly impossible for many technology start-ups. But in return for this, we ask companies to do much more in the area of corporate governance,’ he explains. HKEx is currently working with the SFC to determine which direction Gem regulation should take. ‘Whenever you allow companies with a short history to list, there are bound to be some that do not do very well. We have to ensure they have appropriate disclosure and transparency, so we can leave it to the market to decide.’ Though HKEx has faced criticism over Gem, the market operator would have been doubly damned had it failed to provide a second market for high-tech capital raising.
Despite its recent troubles, Fok believes that the worst is now over for companies on Gem. ‘I was encouraged by the fact that about 60 percent of Gem companies make money. Things are improving, and we now have some very good companies coming to market. This market has a very short history. We should give it more time.’
Gem’s troubles have had little apparent impact on the success of HKEx. The company has already doubled its share price since its IPO and is now the largest listed specialist stock exchange operator in the world. But it has not forgotten its duty to all investors. ‘Under the law, whenever there is a conflict between the interests of the public and ourselves, the public interest is above our business interest,’ Fok stresses. ‘We could shoot for short-term benefits, but that would drive away institutional investors. We want quality companies, and we want our market to be a high quality market. We provide the arena and try to ensure the highest degree of transparency.’ Fok and his colleagues clearly want more transparency and better governance. The question is whether Hong Kong-listed companies want the same. As for HKEx, it is intent on setting a useful precedent for both the current and many future listed companies in the region.
