We have been on a remarkable journey in the Hong Kong financial market over the past several years, and a brand new era will begin tomorrow when new rules take effect that will open the door to innovative companies that use non-standard share structures and pre-revenue biotech companies.
The changes are reflected in new passages in our Listing Rules, but their significance is so much greater: they culminate in the single most transformative change to our market in a quarter century, dating back to the introduction of the H-share regime back in 1993.
On the 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, and winning. 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’ve proven it again by taking a very difficult - and sometimes divisive - issue and working out a solution that is broadly accepted across our market.
It was just five short years ago that the thought of welcoming WVR companies would not have been taken seriously. We had just lost a major listed firm to the United States, and we needed to examine whether we were doing everything we could to be competitive. Without the broader market consensus to move forward, we could only begin by debating all sides of the issue through a virtual reality of a dream blog.
In the intervening years, we saw the continued rise of new economy companies, many from our own backyard in Mainland China. We issued two concept papers and a consultation paper, heard from market participants, investors and other stakeholders, and saw the debate play out dramatically on television and in newspapers. I also put in my two cents over the years, blogging several more times to argue that Hong Kong needs to position itself as a leading venue for the next generation of technology companies, and that the market should study the issue carefully and make a proactive decision. Hong Kong is simply too important for us to avoid grappling with these questions.
With all sides having had their say, the Hong Kong government, SFC, HKEX and market participants joined hands to work out exactly what the new rules should look like. Without the leadership of the government, the support of the SFC and valuable contribution from all sides, today simply wouldn’t be possible. It’s a strong signal that we can cooperate, overcome differences, reach a consensus and find the right path forward together. It’s what this city does best.
Staying relevant, staying competitive
There is no question that Hong Kong is under tremendous competitive pressure - capital markets around the world are in a fierce battle to attract listed companies and investors. We are not immune from these dynamics in Hong Kong.
The explosive growth of the new economy, particularly in China, has changed the economic 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 at identifying trends and attracting these lucrative firms to their markets.
We have been slow to adjust, but it’s not too late. We are at the precipice of a gold rush of new economy companies from China, and it’s vital that we position ourselves to benefit from this development. In fact, Hong Kong has a long history of leveraging China’s growth to develop our own market. A large share of our success over the past 30 years has been due to China’s rapid growth — as China becomes more prosperous, Hong Kong benefits. It’s a virtuous cycle that I don’t expect to change anytime soon.
China is developing and internationalising faster than ever before. Mainland regulators recently announced the introduction of China Depository Receipts (CDR), which will attract more new economy firms to list on the Mainland. CDRs give these companies more choice, and will likely substantially accelerate the development of the new economy in China. This is good news for Hong Kong, because more companies seeking listings enlarges the pie for everyone. In relative terms, the Mainland may benefit much more from the introduction of CDRs and other reforms, but Hong Kong is still much better off than had the Mainland taken no action at all. The more China opens, the more its economy grows, and the more prosperous the country becomes, the better off we are in Hong Kong.
I have no doubt that many firms will choose Hong Kong as their listing destination because of our many competitive advantages. We have now expanded our Listing Rules to welcome new economy companies, like New York, but we are close to the Mainland and more connected to China in terms of culture, language and trading habits. Compared to the Mainland exchanges, we are much more international and market-oriented; our regulatory framework is basically based on disclosure and operates according to market principles. We are both international while having a deep understanding of China’s national conditions. We have the best of both worlds, which gives our market a special appeal.
When we looked at ways to enhance our competitiveness and open our market up to a broader array of companies, we had to find ways to ensure that Hong Kong retained its reputation as a market that treats investors fairly and protects them to the greatest extent possible from potential malfeasance. I want to address this issue directly, because it’s one that speaks to the core of who we are.
The rule changes taking effect tomorrow do not diminish protection for investors in any way. We have not changed the current regime at all in terms of investor protection — rather, we have changed how we look at how controlling shareholders obtain their controlling position.
Here’s how it works: we’ve traditionally recognised a controlling shareholder’s position by looking at the financial capital he or she has contributed to the company. In other words, the shareholder’s control is commensurate with how much he or she has injected into the company. This is easily understood and how we’ve operated our market for a long time.
Under the new rules, we are recognising that there are other ways for shareholders to control a company beyond simple capital injections. For instance, a shareholder’s human capital, such as intellectual property, new business models, or founder’s vision can be considered as acceptable means of acquiring control. So we are not changing how minority shareholders are being protected, we are simply opening the door to allow different ways for controlling shareholders to establish control.
Once that happens, those controlling shareholders will be regulated in the same way as we currently regulate controlling shareholders. On top of that, we are introducing additional safeguards to protect investors against the potential misuse of power.
The biotech revolution
Among all the changes to our Listing Rules, it’s the biotech chapter that I’m most excited about.
We are on the precipice of an explosion in the development of new drugs and technologies that have the potential to transform human development on a global scale. We are seeing breakthroughs in science that could solve real problems like disease, infant mortality, a sustainable food supply, and potentially the ability to drastically improve our life expectancy. There is currently tremendous energy and investment in new pharmaceuticals, treatments and service models that could revolutionise our lives and those of our children, helping us to live healthier, longer.
This goes far beyond financial markets or Listing Rules. This is about human development, and we want to deploy our capabilities and advantages as a deeply liquid global financial centre to push this industry forward and provide the funding they need, so the rest of us can enjoy the benefits of their hard work and important breakthroughs.
In the United States, we’ve seen the baby boomers grow into retirement, which is putting new demands on the healthcare system. In a couple of decades, China’s middle class — now the largest in the world — will also be seeking new treatments that help them handle pain, improve hearing or eyesight, or move around efficiently so they can enjoy precious time with their families. China’s regulatory authorities have also recognised these demographics, and are keen on overhauling the drug approval mechanism and accelerating the research and development process for innovative drugs. These market trends will drive significant development and a massive need for capital in the coming years.
We are already seeing innovative companies in China using the Internet to transform the way healthcare is delivered, and we want Hong Kong to be a platform for these companies to grow and develop products and services that benefit all of us. Capital markets have an important role to play, and Hong Kong is perfectly positioned to be at the forefront of this global biotech revolution.
Of course, with great promise comes great risk. A pharmaceutical firm won’t generate any revenue until it successfully goes through a long process of clinical tests and regulatory approvals. Biotech companies require huge investments into research and development, have extremely long life cycles, and a low success rate. For every home run, there might be a dozen strikeouts — or many more. While this underlines the risks of investing in pre-revenue companies, the good news is biotech is strictly regulated by national pharmaceutical regulatory authorities in the US, Europe and China, which is one reason that biotech made sense for our market. Each stage of development for a biotech firm has clear and explicit regulatory standards, which investors can reference when making investment decisions.
The inherent risk in biotech means it’s more important than ever that investors do their homework. When we set a suitable threshold for listing, we did so according to industry standards while incorporating special disclosure requirements so investors can make informed decisions. However, there’s no way we can guarantee only successful companies will list. The best we can do is to strengthen our knowledge about the sector, exercise judgment in our vetting process and require sufficient and appropriate disclosure. We are close to finalising appointments to a new Biotech Advisory Panel and have invited experts and others with deep experience in the sector to provide guidance to our Listing Department. We are learning from other markets in how they handle biotech firms, and will improve as we go along.
I’d like to reiterate that biotech investment is not for the faint-hearted investor. Investors should be aware that one clinical test failure could be a major setback for a listed pharmaceutical firm and instantly evaporate much of its market capitalisation.
Tomorrow is the first day of our new journey, but we are not finished trying to improve our listing regime and enhancing our competitiveness. Innovative and biotech companies are new to Hong Kong, so we will be taking a very humble approach and learning as we go along. We will be agile, adopt some practices used elsewhere, and continually fine tune the disclosure standards and post-listing regulatory systems until we get it right. We will also carefully monitor the new rules and listen to feedback from the market. In short, if change is needed we’ll do it.
We need 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 the future success of Hong Kong.
I don’t expect companies to choose to list in Hong Kong simply because we now allow WVR or pre-revenue biotech firms. I expect companies to come to Hong Kong because we have a deeply liquid market, because we have a world-class legal system, because our rules and regulatory structures are transparent and accountable, and because we operate according to well-understood international standards. In addition, we are on the doorstep of the world’s second largest - and arguably most dynamic - global economy with innovative trading connections with Shanghai and Shenzhen that are bringing even more Mainland investor participation to our market. This is why companies will continue to choose Hong Kong. The new rules simply mean we no longer need to automatically turn away exciting new economy firms, and we no longer need to deny Hong Kong investors from benefitting from these firms’ successes.
Tomorrow is a new dawn for the Hong Kong market. It marks the start of a new era. Now we must get to work, in the greatest spirit of Hong Kong, to compete hard and solidify our standing as one of the brightest and successful financial centres in the world.
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