The Stock Exchange of Hong Kong

Good morning ladies and gentlemen.

As a businessman, I sometimes feel that running a business is a lot like swimming. As long as you keep swimming, you continue to make progress. But when you stop swimming, you will sink to the bottom and probably drown. Business people need to keep moving ahead -- just to survive.

During the past few years, the Stock Exchange has introduced at least one new major service or technical development each year. It has kept moving ahead to meet the needs of its members and market participants, and to survive against increasing competition. This year's major new service is the Growth Enterprise Market, or GEM.

The Exchange first considered introducing a second market in 1987. It shelved the idea following the global market crash in October of that year. It re-examined the idea in 1996, but the market showed little enthusiasm.

We began to look for new economic opportunities following a review of Hong Kong's economic development, triggered by the 1997 Asian financial crisis. A consensus emerged that Hong Kong needed a wider economic base that included innovation and technology companies.

The Exchange consulted the market in 1998 on the capital needs of these industries and received a very positive response to the idea of creating a second board to assist capital formation by growth companies. In August this year, the Exchange announced the rules for GEM; and in September, published the first list of sponsors.

By the end of September, the Exchange had received seven listing applications, and expects the first listing to take place in the next few weeks. I think you will agree that GEM has kept moving ahead and has kept its head above water.

As we move into the new millennium, it is clear that the development and growth of technology and innovation based companies will be crucial to the economic growth of the Asian region. However, few capital formation facilities are available to these companies.

At least in their early stages, growth companies are unable to raise capital from the main board, with their track and profitability record requirements. Consequently, many promising companies are unable to keep moving forward.

GEM's mission is to provide a venue for growth enterprises to raise capital for the development and expansion of their businesses. This also allows the venture capitalists to liquidate their investment in good growth companies, thereby recycling their investments in other high potential companies which require the funds. These two factors structurally move forward the corporate financing cycle for growth companies. The resulting stimulation on growth industries in our region will be an important contributor to our economy.

GEM aims to satisfy the quality of transparency and regulation sought by informed investors seeking to participate in economic growth in China and the region. It also fosters the development of technology and high value-added industrial companies by providing a separate identity, and increases investors' confidence in them through the many benefits associated with listed companies such as transparency.

GEM is an alternative market to the Exchange's main board. It has its own management and staff and operates independently of the main board. It has its own listing rules and requirements. These may, in some respects, be identical to the main board requirements, but will differ in many other respects.

The first difference comes at the entry to the market stage. GEM has lowered the barrier by requiring applicants to have a two-year, rather than three-year, history. It has no profitability requirement.

The Exchange recognises the risks associated with investment in growth companies without a performance record and has adopted a buyer beware philosophy. Investors have to sign an agreement with their brokers acknowledging their understanding of the risk - before being allowed to enter the market.

One of the major principles of the GEM Listing Rules is the strong disclosure philosophy. Both at the time of listing and afterwards, issuers are required to make frequent and timely disclosures to enable investors to make informed investment decisions.

Listing applicants have to disclose their business objectives for the first two years after listing. After listing, they have to make reports quarterly and every 6 months for the first 2 years. Their achievements will be measured against their disclosed objectives.

Companies must publicly disclose any changes in their business objectives. And any major change of the nature of the business requires the approval of the independent shareholders.

Listing applicants must have a strong corporate governance base to enable them to comply with the listing rules. The directors must have the competence, character and experience to be directors of a publicly listed company.

The company must appoint at least two independent non-executive directors, and appoint a full-time qualified accountant to oversee the financial, accounting and internal control matters.

GEM aims to advance the availability of funding to companies which may be smaller and newer but which have established a niche in their own businesses. They will often include technology-related and high value added industrial companies.

However, the principles of good corporate governance will apply just as much to companies listed on GEM as on the main board. It may even be more important for GEM listed companies to demonstrate that they are taking corporate governance seriously.

I have spoken at some length about GEM because I want to dispel any notion that it has been created at the expense of investment quality or investor protection.

The differences in listing requirements mainly stem from the different company profiles and characteristics of the companies seeking listing. Good corporate governance is equally important for GEM and main board listed companies.

Investors will be relying heavily on the integrity of the management of GEM companies and the professional diligence of their sponsors. Heavy reliance will also be placed on disclosure to ensure market fairness.

Our investor protection regime is moving away from a merit-based system, where regulators make judgements about the quality of listing candidates. We are moving more towards the United States' disclosure based regulatory philosophy where full, fair and accurate information is disclosed to investors. Timely and detailed information enables investors to make their own decisions.

Under a disclosure-based regulatory philosophy, GEM listed companies need to observe strict disclosure requirements. The regulators will enforce disclosure if necessary, and take tough disciplinary action against offenders.

The GEM Listing Rules are designed to provide assurance both to issuers and investors as it is vital for Hong Kong to show that the market is effectively regulated.

However, regardless of how effective our market regulation is, it does not mean that no GEM listed company can fail. There will always be failures as well as successes in markets that encourage enterprising businesses and activity. We accept this - but we won't accept lapses in corporate governance.

I hope I haven't scared you off, because I would like to tell you why you should consider listing in Hong Kong on GEM.

There used to be an advertisement for an Australian Bank that advised potential bank customers to go with the strength. Hong Kong is the second largest stock market in Asia, after Japan, and tenth largest in the world.

It is well established as the home market for capital formation by Chinese enterprises. In 1997, China based companies raised more funds in Hong Kong than in all other markets combined.

Participants in Hong Kong's financial markets include the biggest names in international investment banking, fund management, venture capital and financial intermediation.

Hong Kong offers great market liquidity. Its retail investor base accounts for over 30 per cent of its trading turnover. Hong Kong accounts for 87 per cent of the turnover in stocks that are dually listed in Hong Kong and the United States.

Finally, Hong Kong is a business friendly place. Direct taxes are low by international standards. There is no withholding tax or foreign exchange control. Profits can be freely repatriated. And there is a skilled and enthusiastic workforce.

Above all, Hong Kong knows that, like a swimmer, it has to keep moving ahead. GEM is moving ahead. Let it be the source of new capital for you and the motive force that will drive your progress and success.

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