Good afternoon, Ladies and Gentlemen.

Thank you very much for inviting me to speak to you today.

Macro factors reshaping the financial markets

I have been asked to talk about the changing international financial markets and the Hong Kong Exchanges' place in that changed environment. The most important factors bringing about the changes are globalisation and technological advances. I shall talk briefly about their impact before I outline how we in Hong Kong Exchanges deal with the challenges that they bring about.

Globalisation

Rising affluence in the past decade or so have led to a rapidly expanding investor base and a fast increasing volume of investor savings. Institutional investors, in particular, are actively diversifying the funds they manage across markets to seek higher returns. This has stimulated increasing cross-border portfolio investment. At the same time, multinational companies are trying to list their shares in more than one exchange in order to tap investors' liquidity globally. The world's securities and derivatives exchanges are finding themselves serving not only the needs of domestic companies and investors, but also those beyond their national borders. And in response, many governments and regulatory bodies are pursuing liberalisation policies to open up their markets to international participation. As a result, financial markets are becoming more and more closely linked.

China's accession to WTO

Asia has not been immune to this globalisation trend. Indeed, the rapid economic development in Asia in the 1980's and 1990's can be attributed in part to the substantial capital inflow into this region. Although the inflow has declined somewhat during the Asian financial crisis, we can anticipate it to regain its momentum as the economies of the Asian countries recover.

Concurrent with this recovery, we are seeing the accession of China to the WTO. This would no doubt heighten China's demand for capital as enterprises in both the state-owned as well as the private sectors in the Mainland seek funds in their drive to reform and prepare themselves for the competition resulting from the accession.

Hong Kong as the capital formation centre for China

Hong Kong, as a leading international financial centre in Asia, has been playing a pivotal role in helping the Mainland of China to meet her capital needs. Since 1993, when the first Mainland-registered state-owned enterprises started to list on the Stock Exchange of Hong Kong - the so-called H-share companies - 50 such enterprises have now been listed in Hong Kong.

From 1993 to 1999, the total amount of new capital raised by these Mainland enterprises through Hong Kong has exceeded US$36 billion, representing some 84 per cent of the total amount of capital raised by these companies in all markets outside the Mainland. In the first ten months of this year alone, another US$6.7 billion have been raised by H share companies, almost thirteen times the total for the whole of last year.

Hong Kong also provides most of the trading liquidity for the listed shares of these H share companies. For example, in the twelve months ending June 2000, more than 80 per cent of the total turnover of H-shares dually listed in New York and Hong Kong was recorded in Hong Kong. This is understandable given that the activities, and hence media and analyst reporting, of these companies are primarily in this part of the world.

In addition to the H share companies, 69 China-affiliated companies registered outside the Mainland - the so-called Red Chip companies - are also listed here in Hong Kong. Together, they make up about 27 per cent of our market capitalisation and 28 per cent of the turnover in our equity market.

All these figures point to the fact that Hong Kong has been very successful in performing its role as the primary international capital formation centre for China.

Further strengthening this role

We in the Hong Kong Exchanges are working to strengthen this role. For example, we have been stepping up marketing efforts in the Mainland to enhance the understanding among Mainland enterprises of the benefits of listing in Hong Kong. We are planning to set up a liaison office in Beijing to further enhance these efforts through more direct promotion of our services. And we are working closely with the China Securities Regulatory Commission and the two stock exchanges in Shanghai and Shenzhen to improve cross border cooperation. We are confident that, through all these efforts, Hong Kong's role as the primary international capital formation centre for China will become even more important following China's accession to the WTO.

Technology

Let me turn to the second factor that affects the global financial markets, namely technology. I dare say that globalisation of the markets would not have happened as fast and as extensively as it had without the rapid advances in information technology and telecommunications in the past two decades.

Impact of the Internet

I could spend the rest of this afternoon talking about technological advances and how they affect financial markets. But, in the interest of time, I shall focus on the Internet's impact on the business of exchanges.

The Internet has added a new dimension to our business by speeding up, streamlining and synchronising the processing of financial transactions. It disseminates information more widely and efficiently and increases market transparency.

The Internet will level the playing field for both large and small investors, and encourage the investment in the securities market by those who may have been deterred from doing so by the perception that they would be at a disadvantage compared to the big investors.

However, they need no longer be deterred now as on-line trading hands back power to the investor.

On-line trading in Hong Kong

On-line trading is still in its infancy in Hong Kong. According to a survey done by the Securities and Futures Commission in April this year, on-line trading accounted for only 1.3% of our total market turnover. This low level of participation is attributable in part to the fact that few brokers, in fact less than 4% of the registered dealers in Hong Kong, offer on-line trading services to their clients. The other reason for the low participation is that none of the offering is genuine straight through processing of client orders. I hasten to add that this is through no fault on the part of the brokers. The previous trading system of our stock market was a closed one, accessible only from proprietary terminals developed by the Exchange. Although brokers could receive orders via the Internet, they still have to re-input the orders using the proprietary terminals before the orders could be accepted for matching by the Exchange's central trading system.

All this will be changed with the roll out of our new trading system, the third generation automatic order matching and execution trading system, or AMS/3 in short. The new trading platform of AMS/3 was launched earlier last month. We are working with the brokers to roll out the Multi-Workstations and Broker Supplied Systems in phases in the next few months. By February/March next year, when all this has been rolled out, the new functionalities for genuine Internet trading can be switched on.

AMS/3

Apart from improvements in the speed and capacity of the trading engine and network, AMS/3 has been designed with an open architecture so that it can provide a range of new functionalities not previsously possible with the earlier versions.

Multi-channel access

First, AMS/3 allows multi-channel access. In addition to direct links with brokers, AMS/3 incorporates a new Order Routing System, the ORS. The ORS, which is expected to come into service around February/March next year, will permit investors to input trading requests directly into the Exchange's trading system through external networks, including the Internet and mobile phone networks. These requests will then be routed to the brokers for verification, of credit or share ownership as the case may be, before submission to the Exchange's central trading engine for matching. After the orders have been successfully executed, a message to that effect will be returned to the investors. All these will happen within seconds. And depending on the brokers, the order execution may be integrated directly with their back office systems so that little manual intervention will be required to process an order. Under such a scenario, genuine straight through processing of client orders can be achieved.

Multiple Markets and Alternative Trading Method

Other new features of AMS/3 include support for concurrent and continuous trading in multiple markets, thus permitting each market to have its own range of products, trading hours, trading currencies, and trading rules. Also, new trading methods such as single price auction and quote-based market-making will be available under AMS/3 if there is a market demand for them. This will greatly increase our flexibility in launching new products.

Impact of AMS/3

AMS/3 will bring greater convenience and flexibility to the market, from issuers through brokers to investors. It will significantly raise the productivity of the market and enable higher turnover processing. It will help brokers to improve operational efficiency, reduce costs and provide better services to their clients.

AMS/3 will provide a platform for the implementation of straight through processing. It will facilitate T+0 settlement, which will help to reduce market risks for investors, brokers as well as HKEx.

Experience elsewhere

Experience elsewhere suggests that on-line trading will lead to a significant growth in investor participation, especially in the retail sector, once investors have become familiar with the new on-line trading environment.

For example, in Korea, turnover on the stock exchange there increased threefold in the 15 months to March 2000 after on-line trading became available. As at August of this year, about 50 per cent of all Korean securities transactions are conducted on-line, driven mostly by retail investors.

In Taiwan, the number of investors trading on the Taiwan Stock Exchange over the Internet passed the 1-million mark in April this year. The value of on-line trading has increased geometrically and accounted for more than 5 per cent of total turnover in May, compared to less than 2 per cent for the four-month period, January to April.

Expectations for Hong Kong

Globalisation and technological advances will continue to reshape the global market. In this new financial landscape, exchanges are operating in a buyer's market driven by different investor needs and issuer preferences. Buyers will gravitate to those markets that best meet their needs. Markets meeting investors' needs usually have high market liquidity, low transaction costs, and easy access to market information. In addition, their operations have to be fair and transparent. Issuers of securities will gravitate to the most liquid market with the largest pool of investors, competitive regulatory costs and a level playing field.

In this new financial landscape, exchanges are no longer the only market place where buyers and sellers can be matched efficiently. Change has become imperative and not-for-profit mutual organisations run by members for members are inadequate to compete effectively in this new environment. The recent reform that has taken place in the securities and futures markets in Hong Kong, namely the demutualisation and merger of the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange and their associated clearing houses, is our response to the fundamental changes in the financial landscape. It enables us to provide integrated products and services both vertically and horizontally to meet market demands. It also enables us to carry out our regulatory functions more effectively across markets. All this will, I believe, help to maintain Hong Kong's position as a leading international financial centre in the Asia Pacific region.

Thank you.

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