Dawn of a new era
Wehave been on a remarkable journey in the Hong Kong financial market over thepast several years, and a brand new era will begin tomorrow when new rules takeeffect that will open the door to innovative companies that use non-standardshare structures and pre-revenue biotech companies.
Thechanges are reflected in new passages in our Listing Rules, but theirsignificance is so much greater: they culminate in the single mosttransformative change to our market in a quarter century, dating back to theintroduction of the H-share regime back in 1993.
Onthe eve of this change, I wanted to share some thoughts with you.
Building a consensus takes time
First,Hong Kong has a long history of punching above its weight, competing hard, andwinning. We are a small market, so it’s vital that we stay relevant, agile,competitive, and always ahead of the curve. This is in our DNA, and we’veproven it again by taking a very difficult - and sometimes divisive - issue andworking out a solution that is broadly accepted across our market.
It was just five short years ago that thethought of welcoming WVR companies would not have been taken seriously. We hadjust lost a major listed firm to the United States, and we needed to examinewhether we were doing everything we could to be competitive. Without thebroader market consensus to move forward, we could only begin by debating allsides of the issue through a virtual reality of a dream blog.
Inthe intervening years, we saw the continued rise of new economy companies, manyfrom our own backyard in Mainland China. We issued two concept papers and aconsultation paper, heard from market participants, investors and otherstakeholders, and saw the debate play out dramatically on television and innewspapers. I also put in my two cents over the years, blogging several moretimes to argue that Hong Kong needs to position itself as a leading venue forthe next generation of technology companies, and that the market should studythe issue carefully and make a proactive decision. Hong Kong is simply tooimportant for us to avoid grappling with these questions.
Withall sides having had their say, the Hong Kong government, SFC, HKEX and marketparticipants joined hands to work out exactly what the new rules should looklike. Without the leadership of the government, the support of the SFC andvaluable contribution from all sides, today simply wouldn’t be possible. It’s astrong signal that we can cooperate, overcome differences, reach a consensusand find the right path forward together. It’s what this city does best.
Staying relevant, staying competitive
Thereis no question that Hong Kong is under tremendous competitive pressure -capital markets around the world are in a fierce battle to attract listedcompanies and investors. We are not immune from these dynamics in Hong Kong.
Theexplosive growth of the new economy, particularly in China, has changed theeconomic landscape. Innovative companies are reshaping industry after industry,and many of today’s economic champions are deeply rooted in new technologies.Our competitors abroad, particularly in New York, have been very effective atidentifying trends and attracting these lucrative firms to their markets.
Wehave been slow to adjust, but it’s not too late. We are at the precipice of agold rush of new economy companies from China, and it’s vital that we positionourselves to benefit from this development. In fact, Hong Kong has a longhistory of leveraging China’s growth to develop our own market. A large shareof our success over the past 30 years has been due to China’s rapid growth — asChina becomes more prosperous, Hong Kong benefits. It’s a virtuous cycle that Idon’t expect to change anytime soon.
Chinais developing and internationalising faster than ever before. Mainlandregulators recently announced the introduction of China Depository Receipts(CDR), which will attract more new economy firms to list on the Mainland. CDRsgive these companies more choice, and will likely substantially accelerate thedevelopment of the new economy in China. This is good news for Hong Kong,because more companies seeking listings enlarges the pie for everyone. Inrelative terms, the Mainland may benefit much more from the introduction ofCDRs and other reforms, but Hong Kong is still much better off than had theMainland taken no action at all. The more China opens, the more its economygrows, and the more prosperous the country becomes, the better off we are inHong Kong.
Ihave no doubt that many firms will choose Hong Kong as their listingdestination because of our many competitive advantages. We have now expandedour Listing Rules to welcome new economy companies, like New York, but we areclose to the Mainland and more connected to China in terms of culture, languageand trading habits. Compared to the Mainland exchanges, we are much moreinternational and market-oriented; our regulatory framework is basically basedon disclosure and operates according to market principles. We are bothinternational while having a deep understanding of China’s national conditions.We have the best of both worlds, which gives our market a special appeal.
Protecting investors
Whenwe looked at ways to enhance our competitiveness and open our market up to abroader array of companies, we had to find ways to ensure that Hong Kongretained its reputation as a market that treats investors fairly and protectsthem to the greatest extent possible from potential malfeasance. I want toaddress this issue directly, because it’s one that speaks to the core of who weare.
Therule changes taking effect tomorrow do not diminish protection for investors inany way. We have not changed the current regime at all in terms of investorprotection — rather, we have changed how we look at how controllingshareholders obtain their controlling position.
Here’show it works: we’ve traditionally recognised a controlling shareholder’sposition by looking at the financial capital he or she has contributed to thecompany. In other words, the shareholder’s control is commensurate with howmuch he or she has injected into the company. This is easily understood and howwe’ve operated our market for a long time.
Underthe new rules, we are recognising that there are other ways for shareholders tocontrol a company beyond simple capital injections. For instance, ashareholder’s human capital, such as intellectual property, new businessmodels, or founder’s vision can be considered as acceptable means of acquiringcontrol. So we are not changing how minority shareholders are being protected,we are simply opening the door to allow different ways for controllingshareholders to establish control.
Oncethat happens, those controlling shareholders will be regulated in the same wayas we currently regulate controlling shareholders. On top of that, we areintroducing additional safeguards to protect investors against the potentialmisuse of power.
The biotech revolution
Amongall the changes to our Listing Rules, it’s the biotech chapter that I’m mostexcited about.
Weare on the precipice of an explosion in the development of new drugs andtechnologies that have the potential to transform human development on a globalscale. We are seeing breakthroughs in science that could solve real problemslike disease, infant mortality, a sustainable food supply, and potentially theability to drastically improve our life expectancy. There is currentlytremendous energy and investment in new pharmaceuticals, treatments and servicemodels that could revolutionise our lives and those of our children, helping usto live healthier, longer.
Thisgoes far beyond financial markets or Listing Rules. This is about humandevelopment, and we want to deploy our capabilities and advantages as a deeplyliquid global financial centre to push this industry forward and provide thefunding they need, so the rest of us can enjoy the benefits of their hard workand important breakthroughs.
Inthe United States, we’ve seen the baby boomers grow into retirement, which isputting new demands on the healthcare system. In a couple of decades, China’smiddle class — now the largest in the world — will also be seeking newtreatments that help them handle pain, improve hearing or eyesight, or movearound efficiently so they can enjoy precious time with their families. China’sregulatory authorities have also recognised these demographics, and are keen onoverhauling the drug approval mechanism and accelerating the research anddevelopment process for innovative drugs. These market trends will drivesignificant development and a massive need for capital in the coming years.
Weare already seeing innovative companies in China using the Internet totransform the way healthcare is delivered, and we want Hong Kong to be aplatform for these companies to grow and develop products and services thatbenefit all of us. Capital markets have an important role to play, and HongKong is perfectly positioned to be at the forefront of this global biotechrevolution.
Ofcourse, with great promise comes great risk. A pharmaceutical firm won’tgenerate any revenue until it successfully goes through a long process ofclinical tests and regulatory approvals. Biotech companies require hugeinvestments into research and development, have extremely long life cycles, anda low success rate. For every home run, there might be a dozen strikeouts — ormany more. While this underlines the risks of investing in pre-revenuecompanies, the good news is biotech is strictly regulated by nationalpharmaceutical regulatory authorities in the US, Europe and China, which is onereason that biotech made sense for our market. Each stage of development for abiotech firm has clear and explicit regulatory standards, which investors canreference when making investment decisions.
Theinherent risk in biotech means it’s more important than ever that investors dotheir homework. When we set a suitable threshold for listing, we did soaccording to industry standards while incorporating special disclosurerequirements so investors can make informed decisions. However, there’s no waywe can guarantee only successful companies will list. The best we can do is tostrengthen our knowledge about the sector, exercise judgment in our vettingprocess and require sufficient and appropriate disclosure. We are closeto finalising appointments to a new Biotech Advisory Panel and have invitedexperts and others with deep experience in the sector to provide guidance toour Listing Department. We are learning from other markets in how they handlebiotech firms, and will improve as we go along.
I’dlike to reiterate that biotech investment is not for the faint-heartedinvestor. Investors should be aware that one clinical test failure could be amajor setback for a listed pharmaceutical firm and instantly evaporate much ofits market capitalisation.
The future
Tomorrowis the first day of our new journey, but we are not finished trying to improveour listing regime and enhancing our competitiveness. Innovative and biotechcompanies are new to Hong Kong, so we will be taking a very humble approach andlearning as we go along. We will be agile, adopt some practices used elsewhere,and continually fine tune the disclosure standards and post-listing regulatorysystems until we get it right. We will also carefully monitor the new rules andlisten to feedback from the market. In short, if change is needed we’ll do it.
Weneed to keep communication lines open, we need to be honest with each other,and we need everybody to pitch in to make it work. We are all invested in thefuture success of Hong Kong.
Idon’t expect companies to choose to list in Hong Kong simply because we nowallow WVR or pre-revenue biotech firms. I expect companies to come to Hong Kongbecause we have a deeply liquid market, because we have a world-class legalsystem, because our rules and regulatory structures are transparent andaccountable, and because we operate according to well-understood internationalstandards. In addition, we are on the doorstep of the world’s second largest -and arguably most dynamic - global economy with innovative trading connectionswith Shanghai and Shenzhen that are bringing even more Mainland investorparticipation to our market. This is why companies will continue to choose HongKong. The new rules simply mean we no longer need to automatically turn awayexciting new economy firms, and we no longer need to deny Hong Kong investorsfrom benefitting from these firms’ successes.
Tomorrowis a new dawn for the Hong Kong market. It marks the start of a new era. Now wemust get to work, in the greatest spirit of Hong Kong, to compete hard andsolidify our standing as one of the brightest and successful financial centresin the world.
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