I.

Overview of the Hong Kong Capital Market

Located in the heart of Asia, Hong Kong positioned itself to be a major international financial center of the continent. Its capital market is comprised of integrated network of institutions and markets which provide a wide range of products and services to local and international customers and investors. Hong Kongs financial markets are characterized by a high degree of liquidity and operate under effective and transparent regulations, which meet international standards. The Government of the Hong Kong Special Administrative Region (HKSAR) abides by the principle of keeping intervention into the way in which the market operates to a minimum and has endeavoured to provide a favorable environment in which business operates. Its policy of low and simple taxation allows maximum room for business initiatives and innovation. There is a strong emphasis on the rule of law and fair market. There are no barriers of access to the market by foreign businesses and no restrictions on capital flows into and out of Hong Kong. Hong Kongs privileged location in the Northeast Asia, on the other hand, makes it a gateway to China. Moreover, Hong Kong is situated at appropriate time zones that allow 24-hour continuous trading of foreign exchange and gold when the two markets in New York and London are closed.

II. Financial Players and Intermediaries in Hong Kong

Preview:A closer look at the financial markets
As of July 2010, there were 146 licensed banks, 22 restricted licence banks, and 27 deposit-taking companies in Hong Kong, together with 70 local representative offices of overseas banking institutions. These institutions come from 34 countries and include 70 out of the worlds largest 100 banks. Together they operated a comprehensive network of about 1,390 local branches, excluding their principal place of business in Hong Kong. Banks in Hong Kong engage in a wide range of retail and wholesale banking business such as deposit-taking, trade financing, corporate finance, treasury activities, precious metal trading and securities broking. Hong Kong has been ranked first in terms of economic freedom for 16 years (1995 2010), according to the Heritage Foundation. The external net assets held by banks and deposit-taking institutions reached HK$1,656 billion (end of May 2010), making Hong Kong one of the largest banking centres in the world. Hong Kong has a mature and active foreign exchange market, the development of which has been stimulated by the absence of exchange controls in Hong Kong and its favourable time zone location. Links with overseas centres enable foreign exchange dealing to continue 24 hours a day around the world. According to a triennial global survey conducted by the Bank for International Settlements in 2007, Hong Kong was the worlds sixth largest foreign exchange market in terms of turnover.

Financial Playersin Hong Kong:

1. Household 2. Government (Hong Kong Special Administrative Region) 3. Commercial Banks Banking in Hong Kong provides structured finance, debt capital markets, mergers and acquisitions advisory, securitization, and syndicated loans, supported by its anchor products in lending, cash management, and treasury to clients, with a wide focus on baking products, corporate finance and financial markets. Hong Kong is a fully-fledged international financial centre, and all types of financial services are readily available in a business environment which combines light but effective regulation with low taxation. Hong Kong has one of the largest representations of international banks in the world: about threequarters of the world's 100 largest banks have a presence there. Hong Kong is a top-ten international banking centre in terms of the volume of external transactions, and the second largest in Asia after Japan. The banking sector plays a vital role in establishing Hong Kong as a major loan syndication centre in the region. The Hong Kong banking system has emerged from the financial crisis in much better shape than many of its counterparts in the US and Europe. Figure 2.1 Hong Kong Market Share by Deposits

According to the Hong Kong Monetary Authority, the aggregate capital adequacy ratio of

The Hong Kong Shanghai Banking Corporation (HSBC) is the most prominent bank in Hong Kong and in the world.

the banking sector at the end of 2009 stood at 16.9% and the liquidity ratio at 47.8%. The classified loan ratio, despite an increase from 2008, remained low at 1.35% and other asset-quality indicators continued to be favorable. At the end of June, 2010, there were 146 licensed banks, 24 restricted license banks and 27 deposit-taking companies in business. These 200 authorized institutions operate a comprehensive network of 1,600 local branches. In addition, there are 70 local representative offices of overseas banks in Hong Kong.Total Employment in the sector are around 80,000. Banking assets amount to more than HKD10 trillion. The banking system in Hong Kong is characterized by its 3-tier system, which is formed by 3 types of banking institutions, namely licensed banks, restricted licensed banks and deposit-taking companies, which are authorized to take deposits from the general public. The 3rd tier of deposit-taking institutions operates under different restrictions. Only licensed banks and restricted licensed banks can be called banks. 4. Investment Banks China International Capital Corporation (CICC) was the number-one underwriter of initial public offerings in China in 2009. Agricultural Bank, China's only unlisted state lender, selected CICC as an underwriter for its dual listing in Hong Kong and Shanghai this year. The IPO could raise $29 billion, making it the world's largest listing ever. 5. Insurance Companies Hong Kong is one of the most open insurance centers in the world. The country offers an excellent environment for insurers and reinsurers amidst a global trend of convergence among financial services industries with its sophisticated capital markets and concentration of fund managers. Hong Kong has the largest number of authorised insurance companies in Asia. In July 2010, there were 169 authorised insurers, 88 of which were incorporated in Hong Kong and the remaining 81 were incorporated in 21 countries, with Bermuda taking the lead. In recent years, Hong Kongs insurance market has shown considerable growth. The gross premium for 2008 was about HK$189 billion. 6. Fund Management

As one of the largest asset management centres in Asia, Hong Kong continues to attract international investors to use it as the platform for investing in the region. Hong Kong's combined fund management business amounted to HK$8,507 billion as at the end of 2009, representing a growth of 45.4 per cent over 2008. Hong Kong is also the regional center for portfolio management activity, including Hong Kong authorised unit trusts and mutual funds and, on a larger scale, institutional fund management. As at March 31, 2010, there were 1,968 authorised unit trusts and mutual funds in Hong Kong. The net asset value of these authorised unit trusts and mutual funds as at December 31, 2009 totalled around HK$7,230 billion. The introduction of the Mandatory Provident Fund1 (MPF) System in December 2000 has generated significant amounts of retirement assets, adding impetus to the further development of the financial markets. MPF is a long-term investment. Hence, apart from creating new and additional demands for investment products, MPF also contributes to greater stability in the financial markets. By June 2009, accrued assets of MPF schemes reached HK$259.71 billion (US$33.3 billion).

7. Foreign Investors Foreign enterprises are growing in numbers to invest in Hong Kong as attracted by improved environment for investment. It features an open and quick information, efficient and clean government, simple taxation, complete infrastructure of banks and financial institutes and legal administration with the exception of high rents and costs in production in Hong Kong. Up to June 1, 2000, a total of 3001 foreign enterprises establish their regional headquarters and offices in Hong Kong, a rise of 20.5 percent over the same period of the year before last. Of these enterprises, many are from the U.S.A and Japan, and about 70 percent are dealing with wholesale and retail businesses, imports and exports, and services including law and accounting firms, and advertisement services. Over 80 percent of them consider it attractive to set up regional offices here, and 96 percent say they would continue to stay in Hong Kong.

MPF is a compulsory saving scheme (pension fund) for the retirement of residents in Hong Kong. Most of employees and their employers are required to contribute monthly to MPF Schemes provided by approved private organisations, according to their salaries and the period of employment.

Comparison of the Financial Intermediaries in the Philippines and Hong Kong

Bangko Sentral ng Pilipinas (BSP)

The BSP is the central bank of the Republic of the Philippines. It was established on July 3, 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP took over from the Central Bank of Philippines, which was established on January 3, 1949, as the countrys central monetary authority. The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its mandated responsibilities.

Hong Kong Monetary Authority (HKMA)2

The HKMA was established on April 1, 1993 by merging the Office of the Exchange Fund with the Office of the Commissioner of Banking. Its main functions and responsibilities are governed by the Exchange Fund Ordinance and the Banking Ordinance and it reports to the Financial Secretary of the Republic of China.

Objective: Objectives: The BSPs primary objective is to maintain y to maintain currency stability within price stability conducive to a balanced and the framework of the Linked Exchange sustainable economic growth. The BSP also Rate system aims to promote and preserve monetary y to promote the stability and integrity of stability and the convertibility of the the financial system, including the national currency. banking system y to help maintain Hong Kongs status Responsibilities: as an international financial centre, The BSP provides policy directions in the including the maintenance and areas of money, banking and credit. It development of Hong Kongs financial supervises operations of banks and infrastructure exercises regulatory powers over non-bank y to manage the Exchange Fund. financial institutions with quasi-banking functions. Responsibilities: y Liquidity Management. y maintaining currency stability within y Currency issue the framework of the Linked Exchange y Lender of last resort Rate system y Financial Supervision y promoting the stability and integrity of
Take note that Hong Kong doesnt have a Central Bank because it is still under the jurisdiction of the Central Bank Republic of China
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y Management

of foreign currency

reserves
y Determination of exchange rate policy y Other Activities. The BSP function as

a banker, financial adviser and official depository of the Government, its political subdivisions, and instrumentalities and governmentowned and controlled corporation.

the financial system, including the banking system y helping to maintain Hong Kongs status as an international financial centre, including the maintenance and development of Hong Kongs financial infrastructure y Managing the Exchange Fund.

The Philippine Insurance Commission

The Insurance Commission is a government agency under the Department of Finance. The Commission supervises and regulates the operations of life and non-life companies, mutual benefit associations, and trusts for charitable uses. It issues licenses to insurance agents, general agents, resident agents, underwriters, brokers, adjusters and actuaries. It has also the authority to suspend or revoke such licenses.

Office of the Commissioner of Insurance3

The Office of the Commissioner of Insurance ("OCI") is the regulatory body set up for the administration of the Insurance Companies Ordinance ("ICO"). The OCI was established in June 1990. The Office is headed by the Commissioner of Insurance who has been appointed as the Insurance Authority ("IA") for administering the ICO. The principal functions of the IA are to ensure that the interests of policy holders or potential policy holders are protected and to promote the general stability of the insurance industry. The IA has the following major duties and powers: authorization, regulation of insurers and regulation of insurance intermediaries.

The Office of the Commissioner of Insurance is governed by the Government of the Hong Kong Special Administrative Region of the Peoples Republic of China

The Philippine Securities and Exchange Commission

The Commission shall have the powers and functions provided by the Securities Regulation Code, Presidential Decree No. 902-A, as amended, the Corporation Code, the Investment Houses Law, the Financing Company Act, and other existing laws. Under Section 5 of the Securities Regulation Code, Rep. Act. 8799, the Commission shall have, among others, the following powers and functions:

The Hong Kong Securities and Futures Commission

The Securities and Futures Commission (SFC) is an independent statutory body established by the Securities and Futures Commission Ordinance (SFCO). The SFCO and nine other securities and futures related ordinances were consolidated into (a) Have jurisdiction and supervision over the Securities and Futures Ordinance all corporations, partnerships or associations (SFO), which came into operation on 1 who are the grantees of primary franchises April 2003. and/or a license or permit issued by the Government; We are responsible for administering the laws governing the securities and futures (b) Formulate policies and markets in Hong Kong and facilitating and recommendations on issues concerning the encouraging the development of these securities market, advise Congress and other markets. government agencies on all aspects of the securities market and propose legislation and Our statutory regulatory objectives as set amendments thereto; out in the SFO are:
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; (d) Regulate, investigate or supervise the activities of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; (f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; (g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise
y to maintain and promote the fairness,

efficiency, competitiveness, transparency and orderliness of the securities and futures industry;
y to promote understanding by the public

of the operation and functioning of the securities and futures industry;

y to provide protection for members of

the public investing in or holding financial products;

y to minimize crime and misconduct in

the securities and futures industry;

y to

reduce systemic risks in the securities and futures industry; and

compliance with such rules, regulations and orders; (h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; (i) Issue cease and desist orders to prevent fraud or injury to the investing public; (j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; (k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; (l) Issue subpoena ducestecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and (n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

y to assist the Financial Secretary in

maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the securities and futures industry. The SFC is divided into a number of operational units: Corporate Finance, Policy, China &Investment Products, Enforcement, Supervision of Markets, Licensing, and Intermediaries Supervision. They are supported by the Legal Services Department and Corporate Affairs Division.

The Hong Kong Capital Markets Association (HKCMA) Established in 1986, HKCMA is an industry association founded by a group of financial institutions active in the Hong Kong market to help promote the development of the local and regional debt capital markets. Since its inception, the HKCMA has performed four main functions:
 Providing various professional recommendations and feedback to regulators

with respect to developmental issues of the debt markets

 Providing a forum for market professionals to discuss and implement best

practices guidelines
 Organizing regular functions for market participants to network  Providing bond market education and training to the public

The activities of the Association are wide and varied. Over the years these activities have included: y Advising the Office of the Exchange Fund in a consultative capacity on the setting up of the Exchange Fund Bills Programme and the Government Borrowing (Bonds) Programme. Assisting the working party of the Securities and Futures Commission (SFC) in the formulation of specific amendments to the Protection of Investors Ordinance (PIO) particularly insofar as the provisions impact the debt securities markets in Hong Kong - and providing ongoing advice and recommendations to the SFC in the context of a more thorough review of the securities laws of Hong Kong (as embodied in the Securities Ordinance, the Companies Ordinance and the PIO). Submitting recommendations to the Financial Secretary in respect of the tax treatment of debt instruments in Hong Kong. The HKCMA was also instrumental in obtaining exemptions from profits tax for HK$ debt instruments issued by the World Bank, IFC, ADB and EIB. Subsequently 6 other supranational bodies were also granted profits tax exemption status. Working to institute a Central Custodian system for the clearing of HK$ instruments. Advising the Commissioner of Banking on the proposed amendments to the framework of liquidity ratio requirements for authorised institutions - with specific reference to debt instruments traded by our Members.

y y

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y y y

Visiting PRC authorities and conducting seminars with a view to assist PRC entities to approach the international and regional capital markets. Advising the Mandatory Provident Fund Office in setting up of investment guidelines for the MPF. Providing advice to various Government and Government-related authorities such as the Financial Services Bureau and the Trade Development Council on issues related to the promotion of the Hong Kong SAR as a prominent international financial centre. Holding a regular meeting with the Government, chaired by The Hong Kong Monetary Authority and attended by senior representatives of theFinancial Services Bureau and the SFC, to provide feedback on market developments (particularly impediments to market growth) and exchange ideas and information on future policy formulation.

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III. Financial Instruments in Hong Kong

A. Securities Market In terms of total equity funds raised in the first half of 2010, Hong Kong ranked seventh in the world and fourth in Asia. A wide variety of products are traded in the stock market, ranging from ordinary shares to options, warrants, Callable Bull Bear Contracts (CBBCs), Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), units trusts and debt securities. 1. Equity Securities In Hong Kong, shares are listed either on the Main Board or on the growthEnterprise Market (GEM)4of The Stock Exchange of Hong Kong Limited (Stock Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx). Equity securities generally referred to as shares, comprise ordinary shares and preference shares. Most of the equity securities listed on the Exchange are ordinary shares that account for most of the turnover of the Exchange. 2. Hong Kong Depositary Receipts (HDRs) HDRs are securities issued by a depositary representing the underlying shares of a listed issuer which have been placed with the depositary or its nominated custodian. The subject matter of listing is the underlying shares represented by the HDRs. HDRs are purchased by investors pursuant to the terms of the deposit agreement. The depositary is the agent of the listed issuer and acts as a channel between the HDR holders and the listed issuer. HDR is the informal name for a DR programme listed on the HKEx securities market. On a general basis, there are no substantial changes to the listing regime. Issuers listing in HDR are still required to comply with the same listing requirements as issuers listing shares. The requirements for admission, the listing process and the continuing obligations are basically the same. At present, the HDR framework applies to the Main Board only and not on GEM though it is subject to a strategic review to extend the programme to GEM. A specific chapter on HDR, Chapter 19B, was added to the Main Board Listing Rules to explain the HDR mechanism and that the Listing Rules will apply in the same manner as to the listing of equity securities although necessary
4

The Main Board and GEM Stock Exchange is further explained on p.

12

modifications or clarifications are given. The HDR holders rights are set out in the deposit agreement, which is subject to approval by the Exchange in accordance with the provisions of Chapter 19B. Investors in HDRs should understand that they are bound by the terms of the deposit agreement. Investors are advised to carefully study the HDR issuers listing document and the deposit agreement, and to understand the rights and obligations of an HDR holder and how they may be exercised. Investors should note that the Exchange does not regulate the fees of the depositaries. Retail investors are allowed to buy HDRs. There are no restrictions on who may buy or sell HDRs. The HKEx first launched its HDR program on July 1, 2008.

3.

Debt Securities Debt securities listed in Hong Kong are traded on or off the Stock Exchange and investors may buy or sell them according to their financial needs. These include bonds and notes which represent loans to an entity such as a government or corporation in which the entity promises to repay the bondholders or note-holders the total amount borrowed. Aside from the corporate and convertible bonds, the two kinds of debt securities in the Hong Kong capital markets that require more emphasis are:
a. Government Bonds

Government Bonds are marketable debt instruments issued by the Hong Kong Special Administrative Region Government (HKSAR Government) under the Loans Ordinance (Chapter 61 of the Laws of Hong Kong). The GB Programme is established for promoting the further and sustainable development of Hong Kongs bond market. The Hong Kong Monetary Authority (HKMA), as part of the Government, is responsible for issuing bonds under the GB Programme. The Government Bonds constitute direct, unsecured, unconditional and general obligation of the HKSAR Government, and rank pari passu with all other unsecured indebtedness of the HKSAR Government incurred for the general revenue from time to time outstanding and without preference for one over the other by reason of priority of date of issue or otherwise. Under the GB Programme, fixed-rate conventional Hong Kong-dollar bonds with maturities of two years or longer will be issued from time to time. This is the simplest form of government bond with which the HKSAR Government guarantees to pay the bondholder interest at the fixed coupon rate, which is a yearly rate, on each scheduled interest payment date at the end of every six months. On the scheduled maturity date of a bond, the Government will pay back 100% of the principal amount of the bond to the

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bondholder. The principal, interest payment and price of a Government Bond are all denominated in Hong Kong dollars. The Government Bonds are denoted by their tenor and time of maturity. For example, a two-year government bond 02GB1110 will be due and payable to investors by two years after the first issuance, i.e. in October 2011. The GB Programme offers both the Institutional Tranche and Retail Tranche, each targeting institutional and individual investors respectively. With strong fiscal position and ample fiscal reserves, the HKSAR Government does not need to finance its expenditures through the issuance of Government Bonds under the GB Programme. The Hong Kong-dollar Government Bonds are issued by the HKSAR Government. They offer investors a fixed rate of return and a steady income in Hong Kong dollars throughout the entire term of the bond. The interest payable on Government Bonds may, depending on market conditions, exceed that prevailing for savings and time deposits, and the return on Exchange Fund Notes of comparable maturities. New retail Government Bonds are issued regularly for subscription by individual investors, who can conveniently purchase Government Bonds through a wide network of Placing Banks, the HKSCC and securities brokers by means of a physical application, by telephone, or by internet-banking facilities where applicable. Government Bonds are designed to carry a small minimum denomination (HK$50,000). Government Bonds may be offered in different maturities to suit the needs of investors. Government Bonds issued can also be traded over the counter or on the Hong Kong Stock Exchange. Individual investors may purchase and sell them according to their financial needs.
b. Exchange Fund Notes (EFNs)

EFNs are Hong Kong dollar debt instruments issued by the Hong Kong Special Administrative Region Government on behalf of the Exchange Fund under the Exchange Fund Ordinance and listed by the Hong Kong Monetary Authority (HKMA) on the Stock Exchange. Whenever the HKMA lists a new issue of EFN, investors may participate in the tendering for the new issue. Investors should contact their brokers regarding the tendering arrangements. EFN trading is similar to stock trading and investors may trade EFN through their usual stock accounts. Like all debt securities (traded on the Stock Exchange), EFN are quoted in units of $100 of their nominal value. The buyer of EFN has to pay to the seller the accrued interest calculated from the last interest payment date to the settlement date. Its objective is to promote exchange rate stability. EFNs, which form part of the Monetary Base in Hong Kong, are issued to help banks manage

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interbank liquidity. EFNs are for the account of the Exchange Fund, and principal and interest are payable from the Exchange Fund.

4. Unit Trust5 / Mutual Fund a. Exchange Traded Funds (ETFs) ETFs are passively managed and open-ended funds which are traded on the securities market of Hong Kong Exchanges and Clearing Limited (HKEx). All listed ETFs are authorized by the Securities and Futures Commission (SFC) as collective investment schemes. ETFs are designed to track the performance of their underlying benchmarks and offer investors an efficient way to obtain cost-effective exposure to a wide range of underlying market themes. Similar to other securities, investors can buy or sell ETFs through their brokers anytime during the securities markets trading hours. ETFs are traded in board lots and the minimum initial investment is usually set at an affordable level. ETFs can be traded any time during the trading hours of HKExs securities market. Listed ETFs usually have market makers, which are known as Securities Market Makers, to provide some liquidity. However, market making for the ETFs is available only during the Continuous Trading Session. ETFs can be broadly grouped into two types: Physical ETFS (Traditional Or In-Specie Etfs) Many of these ETFs directly buy all the assets needed to replicate the composition and weighting of their benchmark. However, some only buy a portion of the assets needed to replicate the benchmark or assets which have a high degree of correlation with the underlying benchmark but are not part of it. Some physical ETFs with underlying equity-based indices may also invest partially in futures and options contracts. Lending the shares they own is another strategy used by some physical ETFs. Investors should read the ETF prospectus carefully to ensure they understand how the fund operates. Synthetic ETFS These ETFs do not buy the assets in their benchmark. Instead, they typically invest in financial derivative instruments to replicate the
5

A professionally managed investment fund which pools an investors money with that of many other investors with similar investment objectives. The aggregate sum is then used by the fund to build a diversified investment portfolio which comprises stocks, bonds and other assets in accordance with the investment objective of the fund.

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benchmarks performance. The ETFs are required to have collateral when investing in derivatives (details of the net and gross counterparty exposure and types and composition of the collateral are published on the ETFs website). An ETFs net risk exposure to any single counterparty cannot be more than 10 per cent of its NAV. Investors should read the ETF prospectus carefully to ensure they understand how the fund operates. ETFs are traded through brokers in the same way as other securities and the settlement arrangements are the same. Most ETFs track a portfolio of assets to provide diversified exposure to selected market themes. However, ETFs may also track a single underlying asset such as gold. While some ETFs provide Hong Kong investors access to a basket of Hong Kong securities, others provide the investors access to overseas markets or other asset classes. ETFs are exposed to the economic, political, currency, legal and other risks of a specific sector or market related to the index that it is tracking. ETF managers do not have the discretion to take defensive positions in declining markets. Investors must be prepared to bear the risk of loss and volatility associated with the underlying benchmarks. b. Real Estate Investment Trust (REIT) A REIT is a collective investment scheme that aims to deliver a source of recurrent income to investors through focused investment in a portfolio of income-generating properties such as shopping malls, offices, hotels and service apartments. At least 90 per cent of its net income after tax is paid to investors in the form of dividends at regular intervals. REIT are mainly regulated by the Securities and Futures Commission (SFC) and must be authorized by the SFC before they can be listed on the Stock Exchange. All REIT listed on the Exchange must meet the general obligations and pricesensitive information disclosure requirements under the Listing Rules, and address any Exchange enquiry about unusual price/turnover movement. Besides, investors should note that the amount available for distribution will be adjusted for losses/gains from real estate revaluation or disposal. Currently, products traded in the HKEx derivatives market are equity index products, equity products, interest rate and fixed income products and gold futures. In the equity index product family, there are Hang Seng Index Futures and Options, Mini-Hang Seng Index Futures and Options, H-shares Index Futures and Options, and Mini H-shares Index Futures. Equity products cover stock futures and options. For interest rate and fixed income products, there are HIBOR Futures and Three-Year Exchange Fund Note Futures.

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5. Structured Products6 a. Derivative Warrants Derivative warrants are instruments that give an investor the right to buy or sell an underlying asset at a pre-set price prior to a specified expiry date. They may be bought and sold prior to their expiry in the market provided by HKEx. At expiry, settlement is usually made in cash rather than a purchase or sale of the underlying asset. Derivative warrants traded in Hong Kong normally have an initial life of six months to two years and when trading in the market each derivative warrant is likely to have a unique expiry date.Hong Kong derivative warrants are usually settled in cash when they are exercised at expiry. In fact, most derivative warrants are sold by their owners on the exchange prior to their expiry dates. b. Callable Bear or Bull Contracts (CBBCs) CBBCs keep track of the performances of the underlying asset. They do not require the investors to pay the full price that is required to purchase the actual asset. The investors who enter such a contract take either a bullish or a bearish position. These contracts have fixed expiry dates that are issued by a third party, generally an investment bank, independent of HKEx and of the underlying asset. CBBC may be issued with a lifespan of three months to five years and are settled in cash only. They are traded on the cash market of HKEx through the Third Generation Automatic Order Matching and Execution System (AMS/3) during the markets trading hours. In terms of its call price, bull contracts must have call price7 either equal to or above the strike price8. For bear contracts, the call price must be equal to or below the strike price. There are two categories of CBBC, namely Category N CBBC and Category R CBBC. At initial launch, issuers can apply to issue CBBC on the following underlying assets:

A structured product is generally a pre-packaged investment strategy based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and/or foreign currencies, and to a lesser extent, swaps. This type of security offers protection of principal if held to maturity. 7 Strike price is the price at which a specific derivative contract can be exercised. Strike prices are mostly used to describe stock and index options, in which strike prices are fixed in the contract. For call options, the strike price is where the security can be bought (up to the expiration date), while for put options the strike price is the price at which shares can be sold.
8

Call price is the price at which a bond or a preferred stock can be redeemed by the issuer.

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Highly liquid Hong Kong stocks listed on the Exchange such as HSBC Holdings plc, Hutchison Whampoa Ltd., PetroChina Co. Ltd., China Mobile (Hong Kong) Ltd. And Cheung Kong (Holdings) Ltd.; Two Hong Kong stock indices: Hang Seng Index and Hang Seng China Enterprises Index (i.e. H-shares Index); Overseas stocks and overseas stock indices; Currencies; Commodities

y y y y

More underlying assets may be added in the future from time to time subject to consultation with the Securities and Futures Commission.

c. Listed Equity Linked Instruments (ELIs) ELI are structured products which can be listed on the Exchange under Chapter 15A of the Main Board Listing Rules. They are marketed to retail and institutional investors who want to earn a higher interest rate than the rate on an ordinary time deposit and accept the risk of repayment in the form of the underlying shares or losing some or all of their investment. When an investor purchases an ELI, he is indirectly writing an option on the underlying shares. If the market moves as the investor expected, he earns a fixed return from his investment which is derived mainly from the premium received on writing the option. If the market moves against the investor's view, he may lose some or all of his investment or receive shares worth less than the initial investment. Three types of ELI traded in HKEx: Bull ELI Currently the most popular one, investors taking a bullish view on the underlying security may consider a Bull ELI, which offers two possible forms of payback on expiry:
y If on the expiry date the closing price of the underlying security is AT or

ABOVE the strike price, investors will receive a cash payment at the total par value of the ELI (total investment plus interest).
y If on the expiry date the closing price of the underlying security is BELOW

the strike price, investors will receive a predetermined quantity of the underlying security at the strike price (total par value/strike price). If the ELI is cash settled in lieu of share delivery, investors will receive a cash payment based on the closing price of the underlying security.

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Bear ELI Investors who are bearish on the underlying security may consider a Bear ELI, which offers two possible forms of payback on expiry:
y If on the expiry date the closing price of the underlying security is BELOW

the strike price, investors will receive a cash payment at the total par value of the ELI (total investment plus interest).
y If on the expiry date the closing price of the underlying security is AT or

ABOVE the strike price, investors will receive a cash payment from the issuer. The cash payment will never be negative and the amount will be zero if the closing price is double or more than double the strike price. Range ELI Investors with a neutral view on the underlying security may consider a Range ELI, which offers three possible forms of payback on expiry:
y If on the expiry date the closing price of the underlying security is WITHIN

THE RANGE of the two strike prices (AT or ABOVE the lower strike price and BELOW the upper strike price), investors will receive a cash payment at the total par value of the ELI.
y If on the expiry date the closing price of the underlying security is AT or

ABOVE the upper strike price, investors will receive a cash payment from the issuer. The cash payment will never be negative and the amount will be zero if the closing price equals or exceeds the sum of the lower and upper strike prices.

B. Derivatives Market As of June 2010, five types of futures product and two types of options product were traded on the Hong Kong Futures Exchange (HKFE), including index futures, stock futures, interest rate futures, bond futures, gold futures, index options and stock options. With the growing presence of Mainland enterprises in Hong Kong stock market, H-shares index futures and options were launched in December 2003 and June 2004 respectively. The derivatives market has become fully electronic with the migration of the trading of Hang Seng Index Futures and Options to the Hong Kong Futures Automated Trading System in June 2000.

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1. Equity Index Products a. Hang Seng Index futures and option contracts (commonly known as HSI futures and HSI options in Hong Kong, are equity index products and major products of HKExs derivatives market in terms of trading volume. The Hong Kong Futures Exchange (HKFE) first introduced HSI futures contracts in May 1986 and then HSI option contracts in March 1993. The underlying asset of HSI futures and options is the Hang Seng Index which is compiled by Hang Seng Indexes Company Limited. The HSI, a market capitalization-weighted index, is widely used as a benchmark for the performance of Hong Konglisted stocks. Basically, there are two types of HSI option contracts, the call option and the put option. A call option gives its holder the right, but not the obligation, to buy the HSI at a predetermined price at expiry, whereas a put option gives its holder the right, but not the obligation, to sell the HSI at a predetermined price at expiry. HSI futures and options have the following characteristics:  The underlying asset is a benchmark for the performance of Hong Konglisted stocks. Since the HSI is widely used as a benchmark for the performance of Hong Kong-listed stocks, HSI futures and options can be used as a hedging tool by investors to manage their risks from exposure to the Hong Kong stock market. Investors can also buy or sell HSI futures or option contracts for pure directional trading whenever they are bullish or bearish about the market.  Cost effective HSI Index futures and options facilitate investment in a cost-effective way as these contracts are traded on a margin basis. The margin to carry an open position is only a fraction of the contracts value.  Low transaction costs as the total value of high-capitalization stocks represented in each HSI futures and options contract is substantial and as commission is only charged once for each transaction in futures or options contracts, transaction costs are low compared to purchasing or selling the constituent stocks.  Clearing house guarantee same as other futures and options contracts traded on HKFE, HSI futures and options are registered, cleared and guaranteed by the HKFE Clearing Corporation (HKCC), a subsidiary of HKEx. HKCC acts as the counter-party to all open contracts, which effectively eliminates counter-party risks between HKCC Participants. However, the guarantee does not cover an HKCC Participants obligations to its clients. Investors should exercise due care and diligence when deciding through whom they will conduct business.

b. Same as HSI futures and option contracts, the underlying asset of Mini-Hang Seng Index Futures and Options is the Hang Seng Index. The contract multiplier for Mini-HSI futures and option contract is HK$10 per index point, or one-fifth of the size of the HSI futures and option contract.

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Mini-HSI futures and option contracts are tailored for individuals who have less risk capital, allowing them to participate in the performance of the constituent stocks in the index with a smaller investment. The margin between the standard HSI and Mini-HSI futures, and between standard HSI and Mini-HSI options can be fully offset, making investment more flexible. c. The underlying asset of H-shares Index Futures and Options is the Hang Seng China Enterprises Index (commonly known as HSCEI, H-shares index or H-share index in Hong Kong). HSCEI is a market capitalisation-weighted stock index compiled and calculated by Hang Seng Indexes Company Limited. HSCEI tracks the performance of major H shares. H-shares Index futures and options provide a risk management tool for investors. H-shares Index futures and options may to be used to implement hedging strategies (to protect a portfolio of H shares against a declining market) or spread strategies (to profit from the relative performance of two markets, eg HSCEI vs HSI). In addition, H-shares Index futures and options allow investors to track the performance of H-share companies in a costeffective way since the capital outlay is less than that required to buy a basket of HSCEI constituent stocks. d. Introduced last February 8, 2010, Flexible Index Options are Hang Seng Index and H-shares Index options contracts which allow market participants to request customised strike prices and expiry months, provided the contracts are bought and sold through the block trade facility. Some key features of Flexible Index Options are:
 Series are created upon the request of an Exchange Participant according

to the stipulated procedures and criteria;

 Strike prices are in whole index points and subject to other limitations;  Expiry must be on the second to the last trading day of any calendar month

and is subject to other limitations;

 A series will not be created if there is a standard series with the same

strike price and expiry;

 Transactions must be through block trades of 100 contracts or more;  No market making as execution is confined to block trades;  Exchange fee, Securities and Futures Commission levy, trading hours,

exercise style and settlement method are the same as standard series. Position limits and reporting requirements are also the same and in combination with the standard series; and

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 There are appropriate risk management measures in place to safeguard the

integrity of the clearing house, which is owned and operated by HKEx. e. Dividend Futures are based on dividends payoff of stock index constituents over one calendar year. There are two types of dividend futures. HSI Dividend Futures and HSCEI Dividend Futures were introduced on 1 November 2010. The underlying assets are the HSI Dividend Point Index and HSCEI Dividend Point Index respectively, which are calculated by Hang Seng Indexes Company Limited. They measure the total cash dividend value for all constituent stocks of the underlying index the Hang Seng Index and the Hang Seng China Enterprises Index (H shares index) expressed in terms of index points. Dividend futures are designed to provide investors a tool to hedge the dividend risk of Hong Kong-listed stocks and to complement the existing range of HSI and HSCEI products. The listed contract months are the three nearest December contract months. Dividend futures allow equity investors to trade on the expected dividend outlook; hedge their dividend exposure or benefit from arbitrage opportunities related to dividend performance. 2. Stock Futures Afutures contract is a legally binding commitment between two parties to buy or sell a specific financial instrument at a given future date at a price set at the time of dealing. Stock futures contracts are traded on the Hong Kong Futures Exchange Limited (HKFE) and guaranteed by the Hong Kong Clearing Corporation Limited (HKCC; the Clearing House), both of them are whollyowned subsidiaries of Hong Kong Exchanges and Clearing Limited (HKEx). The underlying stocks of stock futures are actively traded stocks with large market capitalization. They are often leaders of their industries including blue chips, red chips and H shares. 3. Stock Options A stock option is a contract entered between the contracting parties, a buyer and a seller. The buyer has the right, but not the obligation, to trade an underlying asset with the seller at a predetermined price, within a certain time. The buyer is commonly referred to as the holder and the seller as the writer. The position of a holder is referred to as a long position and that of a writer as a short position. A stock option is traded on HKEx and cleared through the Options Clearing House Limited (SEOCH).

4. Interest Rate and Fixed Income Products

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a. HIBOR futures are linked to the Hong Kong Interbank Offered Rate. There are two types of HIBOR futures: the One-Month HIBOR and Three-Month HIBOR futures contracts. The Hong Kong Interbank Offered Rate (HIBOR) is the rate on which Hong Kong dollar-denominated instruments are traded between banks in Hong Kong. Rates (ranging from one-month to 12-month rates) are set at 11:00 am on Hong Kong business days based on HIBOR quotations provided by 20 banks designated by the Hong Kong Association of Banks.

b. Three-Year EFN Futures are futures contracts based on three-year notional Exchange Fund Notes (EFNs) with a coupon of 6 per cent. The contract size is $1,000,000. EFNs are issued by the Hong Kong Government for the account of the Exchange Fund under the Exchange Fund Ordinance (Cap. 66). 5. Gold Futures The Hong Kong Futures Exchange Ltd. (HKFE), a HKEx subsidiary, introduces trading of gold futures on October 20, 2008 to facilitate investors participation in the gold market. Gold futures were previously traded on the trading floor of the Exchange in the 1990s, which were subsequently suspended due to slow underlying market activities. With renewed trading interest in the gold market, HKFE will reintroduce gold futures trading on the electronic trading platform, the HKATS, to broaden participants range of products offering. HKFEs gold futures contract is an easily accessible leveraged investment tool based on the Loco-London gold standard, which is popular among Hong Kong and international investors. All trading is done electronically. Gold futures can be used for trading or hedging. Potential market participants include investors, bullion dealers, banks and corporations involved in gold businesses and seeking to manage their gold price exposures. The benchmark of an HKFE gold futures contract is gold of not less than 995 fineness. The contract size is 100 troy ounces and prices are quoted in US dollars per troy ounce. Gold futures contracts are traded in US dollars and cashsettled in US dollars. The final settlement price is based on the morning price fixing by The London Gold Market Fixing Limited, and the minimum price fluctuation is US$0.10 per troy ounce. The contract months include spot month and the next two calendar months. Trading hours are from 8:30 am to 5:00 pm. There is no pre-market opening session and no lunch break. The last trading day is on the third last Hong Kong business day of the contract month. HKFEs gold futures are settled in cash because its regulatory, trading and clearing infrastructure and its Exchange Participants infrastructure are best suited for cash-settled gold futures.

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24

IV. Hong Kong Debt Market

DEVELOPMENT OF THE DEBT MARKET Over the past decade, a number of measures have been taken to promote the development of the local debt market, including the issuance of EFBN, and the establishment of the Central Moneymarkets Unit (CMU). The Exchange Fund paper programme has encouraged the growth of the debt market by supplying high quality Hong Kong dollar debt paper and providing a benchmark yield curve for Hong Kong dollar debt. The establishment of the CMU provides an efficient clearing and settlement system for Hong Kong dollar as well as non-Hong Kong dollar denominated bonds, while the linkages with other overseas clearing systems facilitate cross border investment in debt instruments. Other initiatives include allowing the use of Exchange Fund paper as margin collateral for trading futures, index options and stock options. The listing of Exchange Fund Notes on the SEHK since August 1999, broadens the investor base to include retail investors. This paves the way for the listing of debt securities issued by other corporations such as the Hong Kong Mortgage Corporation (HKMC), which has listed its Notes on the SEHK since October 1999. The HKEx introduced the three-year Exchange Fund Notes futures contract in November 2001 so as to provide a risk management instrument for the debt market. To encourage bond listings, the HKEx reduced the listing fees for debt securities from July 1, 2002. Besides, the government put forward a number of measures to streamline the regulations and procedures in issuing and listing debt securities. Continued efforts have been made to enhance the retail bond market, including lowering the minimum denomination requirement for eligible debt securities for tax concession purposes in 1999 from HK$500,000 to HK$50,000; educating the public about bond investment; reviewing the regulations relating to the public offering of debt securities; the issuance of bonds targeting at retail investors through the bank network by the HKMC since 2001; and the launch of retail Exchange Fund Notes. The implementation of the MPF System in December 2000 added impetus to the further growth of the debt market as well as fund management business. The Government Bond Programme, consisting of the institutional bond issuance programme and the retail bond issuance programme, is designed to promote further and sustainable development of the local bond market. Launched in September 2009, the institutional bond issuance programme had an outstanding amount of HK$16 billion at the end of July 2010. For the retail bond issuance programme, the Government will take

25

into account the advice of the Co-arrangers and prevailing market conditions in determining the timing for issuing the Retail Government Bonds. Further details will be announced as appropriate.

The Central Moneymarkets Unit (CMU) established in 1990 provides an on-line access to bond prices and fosters cross-border bond trading and investment.

Regional cooperation for bond market development: APEC Initiative on the Development of Securitisation and Credit Guarantee Markets  Asian Bond Market Initiative (ABMI)  Asian Bond Fund (ABF)

Hong Kond Dollar Bond Market: Steadily growth over the past decade Outstanding Hong Kong dollar bond reached US$85 billion at end-2005 Almost 50% of GDP

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LOCAL CURRENCY BOND STANDING IN HONG KONG

MARKET GROWTH BY ISSUER

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V. Hong Kong Stock Exchange

HISTORY
The first formal securities market, the Association of Stockbrokers in Hong Kong, was established in 1891. A few decades later it was renamed the Hong Kong Stock Exchange (HKSE) or the Stock Exchange of Hong Kong (SEHK). A second exchange, the Hong Kong Stockbrokers' Association was opened in 1921. The two exchanges merged to form the Hong Kong Stock Exchange in 1947. In 1993, the Exchange launched the Automatic Order Matching and Execution System (AMS) that was replaced by the third generation system (AMS/3) in October 2000. The new system enabled the exchange participants to trade from their offices. The HKSE launched its traded stock options market in 1995. The first stock option was on HSBC Holdings plc. In 1999, the HKSE opened the Growth Enterprise Market (GEM) that made the access to the capital market easier for riskier businesses. After a year, the Growth Enterprise Index (GEI) was launched. Finally, the Stock Exchange of Hong Kong together with Hong Kong Futures Exchange Ltd. established in 1976 and Hong Kong Securities Clearing Company Ltd. incorporated in 1989 merged to form a unified company Hong Kong Exchanges and Clearing Limited (HKEx) in 2000. Shares of the HKEx were listed on the Stock Exchange of Hong Kong with a stock code of 388. Reports of securities trading in Hong Kong date back to the mid-19th century. However, the first formal market, the Association of Stockbrokers in Hong Kong, was not established until 1891. The Association was re-named the Hong Kong Stock Exchange in 1914. Pressure to strengthen market regulation and to unify the four exchanges led to the incorporation of the Stock Exchange of Hong Kong Limited in 1980. The four exchanges ceased business on 27 March 1986 and the new exchange commenced trading through a computer-assisted system on 2 April 1986. Prior to the completion of the exchange merger in March 2000, the unified stock exchange had 570 participant organizations.

As at the end of February 2011, 1,437 companies were listed in the Stock Exchange of Hong Kong (SEHK), with a market capitalization of HK$17,131 billion. Among them, 540 were Mainland enterprises which have together raised around

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HK$2,587 billion from 1993 to the end of June 2010. Trading on the SEHK is executed through the third generation of the Automatic Order Matching and Execution System, namely AMS/3. The system provides a trading infrastructure that connects investors, brokers and the exchange, enhancing market efficiency and facilitating online trading in the stock market.

TRADING FLOORS
1. Main Board

The Main Board is a market for capital formation by established companies with a track record of profits or companies meeting alternative financial requirements.

2. Growth Enterprise Market (GEM) GEM was introduced by HKEx for Growth enterprises particularly those emerging ones, i.e. enterprises that have good business ideas and growth potential, to take advantage of financial markets. It offers growth enterprises an avenue to raise capital. It also does not require growth companies to have achieved a record of profitability as a condition of listing. This removal of entry barrier enables growth enterprises to capitalize on the growth opportunities of the region by raising expansion capital under a well-established market and regulatory infrastructure. Besides the listing of local and regional enterprises, international growth enterprises can enhance their business presence and raise their product profile in China and Asia by listing on GEM. GEM also offers investors an alternative of investing in "high growth, high risk" businesses. The future performance of growth companies particularly those without a profit track record are susceptible to great uncertainty. Because of the higher risks involved, GEM is designed for professional and informed investors. It works on the basis of caveat emptor or buyers beware. GEM also provides a fund raising venue and a strong identity to foster the development of technology industries in Hong Kong and the region. It is opened to growth companies big and small engaged in all industries. It promotes the development of venture capital investments. It provides both an exit ground and a venue for further fund raising for investments made by venture capitalists. This

29

facilitates more and earlier investments to be made by the venture capitalists in support of the growth of the industry. In addition, GEM operates on the philosophy of "buyers beware" and "let the market decide" based on a strong disclosure regime. Its rules and requirements are designed to foster a culture of self compliance by listed issuers and sponsors in the discharge of their respective responsibilities. The following major features are to support this philosophy: Greater, More Frequent and Timely Disclosure.

Conglomerates, finance, and property sectors primarily rule the Main Board market. Last June 2002, companies listed on the Main Board gave the market a high volume of 3,951 securities with a market capitalisation of HK$15,704 billion. In addition, Main Board Listing Rules contain a number of financial disclosure requirements. Mostly, they expand on the provisions of the Companies Ordinance. On the other hand, GEM, established in 1999, is geared towards growth companies, particularly those engaged in innovation and technology. And the same as the Main Board market, as of June 2002, GEM market had 194 listed companies with a market capitalisation of HK$150 billion.

HANG SENG INDEX

Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that records and monitors daily changes of the largest companies of the Hong Kong stock market. HSI is the main indicator of the overall market performance in of the country. These 45 constituent companies represent about 60% of capitalization of the Hong Kong Stock Exchange. TOP 45 LISTED COMPANIES (as of February 2011)
               

0005 HSBC Holdings plc 0011 Hang Seng Bank Ltd 0023 Bank of East Asia, Ltd 0388 HKEx Limited 0939 China Construction Bank 1398 Industrial and Commercial Bank of China 2318 Ping An Insurance 2388 BOC Hong Kong (Holdings) Ltd 2628 China Life 3328 Bank of Communications Ltd 3988 Bank of China Ltd 0002 CLP Holdings Ltd 0003 Hong Kong and China Gas Company Limited 0006 Hong Kong Electric Holdings Ltd 0836 China Resources Power 0001 Cheung Kong (Holdings) Ltd

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y y y y y y y y y y y y y y y y y y y y y y y

0012 Henderson Land Development Co. Ltd 0016 Sun Hung Kai Properties Ltd 0083 Sino Land Co Ltd 0101 Hang Lung Properties Ltd 0688 China Overseas Land & Investment Limited 1109 China Resources Land Limited 0004 Wharf (Holdings) Ltd 0013 Hutchison Whampoa Ltd 0017 New World Development Co. Ltd. 0019 Swire Pacific Ltd 'A' 0066 MTR Corporation Ltd 0144 China Merchants Holdings (International) Co Ltd 0267 CITIC Pacific Ltd 0291 China Resources Enterprise, Ltd 0293 Cathay Pacific Airways Ltd 0330 Esprit Holdings Ltd 0386 Sinopec Corp 0494 Li & Fung Ltd 0700 Tencent Holdings Limited 0762 China Unicom Ltd 0857 PetroChina Company Limited 0883 CNOOC Ltd 0941 China Mobile Ltd 1088 China Shenhua Energy Company Limited 1199 COSCO Pacific Ltd 1880 Belle International 1898 China Coal Energy 2038 Foxconn International Holdings Ltd 2600 Aluminum Corporation of China Limited (Chalco)

Hang Seng index as of February 17,

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Hang Seng index as of February 18,

HANG SENG INDEX (HKG: ^HSI ) Index 23,595.24 Value: Trade Feb 18 Time: Change: 293.40(1.26%)

Prev Close: Open: Day's Range: 52wk Range:

23,301.84 23,342.67 23,316.30 - 23,614.61 18,971.50 - 24,988.60

Source:http://finance.yahoo.com/q/bc?s=^HSI&t=1d&l=on&z=l&q=l&c=

HKEx Monthly Market Highlights (as of January 2011)

Securities Market
 

The average daily turnover in January 2011 was $75,016 million, a decrease of 4 per cent when compared with $77,966 million for the same period last year. The average daily turnover of derivative warrants in January 2011 was $14,565 million, an increase of 51 per cent when compared with $9,628 million for the same period last year. There were nine* newly listed companies in January 2011, an increase of 350 per cent when compared with two for the same period last year.

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* Included two companies which transferred listing from GEM to Main Board. Derivatives Market


The average daily turnover of futures and options in January 2011 was 506,832 contracts, an increase of 6 per cent when compared with 479,427 contracts for the same period last year. The average daily turnover of equity index options in January 2011 was 51,685 contracts, an increase of 10 per cent when compared with 47,145 contracts for the same period last year. On 28 January 2011, the open interest of Mini Hang Seng Index Futures and Mini H-shares Index Futures reached a record high of 11,829 and 2,789 contracts respectively. LISTED SECURITIES (MAIN BOARD AND GEM) MONTH-END FIGURES

Jan 2011 Jan 2010 End 2010 No. of listed companies 1,420 1,321 1,413 Total market capitalization ($Bil.) 21,234 16,682 21,077 No. of newly listed companies * 9 2 113 No. of listed securities 8,276 6,627 7,900 No. of equity warrants 22 23 23 No. of derivatives warrants 5,444 3,710 5,148 No. of CBBC 1,134 1,359 1,064 No. of unit trusts 82 53 79 No. of debt securities 170 158 169 * Includes the number of transfers of listing from GEM to Main Board SECURITIES MARKET TURNOVER (MAIN BOARD AND GEM) Jan 2011 Dec 2010 % Change Monthly turnover ($Mil.) * 1,575,345 1,396,362 13% Average daily turnover by value ($Mil.) * 75,016 63,471 18% No. of trading days 21 22 * Turnover value for traded in non-HKD currency securities have been included start from 29 November 2010

TURNOVER BY TYPE OF SECURITIES (MAIN BOARD AND GEM) Jan 2011 ($Mil) 1,090,314.27 Dec 2010 ($Mil) 978,064.53 % Change 11.5%

Equities

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Derivative warrants CBBC Debt securities

(69.2%) 305,868.26 (19.4%) 122,137.06 (7.8%) 0.80 (0.0%) (less than 0.1%)

(70.0%) 227,379.87 (16.3%) 136,209.44 (9.8%) 0.10 (0.0%) (less than 0.1%)

34.5% -10.3% 700.0%

( ) % of market total Turnover value for traded in non-HKD currency securities have been included start from 29 November 2010

MAINLAND ENTERPRISES (MAIN BOARD AND GEM) MONTH-END FIGURES Jan 2011 Jan 2010 No. of H shares 163 156 No. of Red chips Stocks 102 97 No. of NHMPE 330 271 Market capitalization (% of market 55.7% 58.0% total) Turnover value (% of equity turnover) 64.3% 72.2% NHMPE = Non-H Share Mainland Private Enterprises End 2010 163 102 327 56.6% 68.0%

INDEX PERFORMANCEMONTH-END FIGURES Jan 2011 % Change over 1 Month S&P/HKExLargeCap Index 27969.05 2.1% S&P/HKEx GEM Index 756.15 -6.7% Hang Seng Index 23447.34 1.8% Hang Seng China Enterprises Index# 12560.66 -1.0% Hang Seng China-Affiliated 4152.62 -0.4% Corporations Index* # - tracks H shares * - tracks Red chips9

% Change over 12 Months 17.7% 7.3% 16.5% 9.2% 7.2%

A company based in Mainland China that is incorporated internationally and listed on the Hong Kong Stock Exchange. Red chip stocks are expected to maintain the filing and reporting requirements of the Hong Kong exchange, which makes them a main outlet for foreign investors who wish to participate in the rapid growth of the Chinese economy. Red chips may be issued in addition to A-shares in the same companies, although only Chinese citizens can invest in A-shares.

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DERIVATIVES MARKET TURNOVER Average Daily Volume (Contracts) Jan 2011 Dec 2010 % Change Total Futures 163,126 162,369 0.5% Hang Seng Index Futures 82,160 78,564 4.6% Mini Hang Seng Index Futures 31,541 32,992 -4.4% H-shares Index Futures 42,912 44,811 -4.2% Mini H-shares Index Futures 4,625 4,488 3.1% 1 HSI Dividend Point Index Futures 116 31 274.2% HSCEI Dividend Point Index Futures 2 38 26 46.2% Stock Futures 1,697 1,426 19.0% 3-Month HIBOR Futures 3 8 -62.5% 1-Month HIBOR Futures 0 0 3-Year Exchange Fund Note Futures 0 0 Gold Futures 35 21 66.7% Total Options 343,706 317,738 8.2% Hang Seng Index Options 36,793 36,691 0.3% Mini Hang Seng Index Options 2,473 2,265 9.2% Flexible Hang Seng Index Options 3 19 153 -87.6% H-shares Index Options 12,401 14,243 -12.9% Flexible H-shares Index Options 4 0 0 Stock Options 292,021 264,386 10.5% Total Futures and Options 506,832 480,107 5.6% 1 Trading in HSI Dividend Point Index Futures commenced on 01 Nov 2010 2 Trading in HSCEI Dividend Point Index Futures commenced on 01 Nov 2010 3 Trading in Flexible Hang Seng Index Options commenced on 08 Feb 2010 4 Trading in Flexible H-shares Index Options commenced on 08 Feb 2010

CLEARING AND SETTLEMENT

CCASS Statistics (securities market) Average daily number of exchange trades handled by CCASS Average daily number of settlement instructions (SIs) settled by CCASS Average daily number of investor SIs (ISIs) settled by CCASS Average daily settlement efficiency of CNS stock positions on due day (T+2) Shares deposited in the CCASS depository % of total issued shares % of the total market capitalisation DCASS Statistics (derivatives market) Jan 2011 801,317 83,822 537 99.89 Dec 2010 740,199 86,138 533 99.85 % Change 8.26% -2.69% 0.75% N/A

72.10%50.30% 71.80%49.57% N/A N/A Jan 2011 Dec 2010 %

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Change Month-end Open Interest (contracts) Equity Index Futures Stock Futures Interest Rates Futures Gold Futures Equity Index Options Stock Options 220,088 16,644 278 207 374,451 6,276,824 195,184 11,514 267 85 298,137 5,381,215 12.8% 44.6% 4.1% 143.5% 25.6% 16.6%

YEAR-TO-DATE STATISTICS
Securities Market No. of newly listed companies # Average daily turnover by value ($Mil.) ^ Average share traded per trading day (Mil. Shares) Average no. of trades per trading day Fund raised by IPOs ($Mil.) Total funds raised (including IPOs) ($Mil.)* Derivatives Market Average daily volume (contracts) Equity Index Futures Stock Futures Interest Rates Futures Gold Futures Equity Index Options Stock Options Clearing & Settlement Average daily number of exchange trades handled by CCASS Average daily number of settlement instructions (SIs) settled by CCASS Average daily number of investor SIs (ISIs) settled by CCASS Jan 2011 YTD 9 75,016 163,658 801,360 2,002 19,584 Jan 2011 YTD 161,391 1,697 3 35 51,685 292,021 Jan 2011 YTD 801,317 83,822 537 Jan 2010 YTD 2 77,966 130,275 890,954 20,454 47,769 Jan 2010 YTD 188,397 864 15 31 47,145 242,975 Jan 2010 YTD 890,948 83,443 670 % Change 350% -4% 26% -10% -90% -59% % Change

-14.3% 96.4% -80.0% 12.9% 9.6% 20.2% % Change -10.06% 0.45% -19.85%

# Includes the number of transfers of listing from GEM to Main Board ^ Turnover value for traded in non-HKD currency securities have been included start from 29 November 2010 * Provisional figures only

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RECORD HIGH FOR TOP-5 DERIVATIVES MARKET PRODUCTS (BASED ON CONTRACT VOLUME)
Product Record High Daily Volume Contracts Date 805,947 2008/03/27 2010/10/26 Index 228,392 2008/10/28 2007/11/28 2008/01/24 Record High Open Interest Contracts Date 8,825,259 2010/11/26 198,789 2007/06/27 162,527 477,129 11,829 2010/10/27 2010/12/29 2011/01/28

Stock Options Hang Seng Futures H-shares Index Futures 219,689 Hang Seng Index 85,981 Options Mini Hang Seng Index 63,991 Futures

HANG SENG INDUSTRY CLASSIFICATION SYSTEM (HSICS)

Industry 00 Energy Sector 001 Oil & Gas Description - Companies involved in exploration for, refining, distribution & supply and production of oil & gas; includingsuppliers of oil & gas equipment - Companies involved in mining,distribution & supply of coal
- Companies engaged inexploration, refining, financingand developing of mines,excluding coal which is classifiedunder Energy - Producers, processors andtraders of industrial metals,including steel, bauxite,aluminum and iron, excludingmanufacturers of end products - Companies engaged in themanufacturing, processing anddistributing of basic materials forfurther processing into finishedproducts, such as chemicals,fertilizers, timber and paper - Manufacturers and distributors ofindustrial products, includingproduction of machinery &equipment, electronic products,commercial vehicles & trucksand glass but excludingconstruction materials, metalsand chemicals - Companies engaged inmanufacturing, assembling anddistribution of passengerautomobiles, motor cycles andauto parts - Producers and distributors ofhousehold

002 Coal 05 Materials 051 Mining 052 Metals

053 Basic Materials

10 Industrial Goods

100 Industrial Goods

20 Consumer Goods

201 Automobiles 202 Household Goods & Electronics

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203 Textiles & Clothing 204 Food & Beverages 205 Health & Personal Care

206 Agricultural Products 30 Services 301 Retailers 302 Hotels & Entertainment 303 Media & Publishing 304 Transportation

305 Support Services -

35 Telecommunications 40 Utilities 50 Financials

350 Telecommunications 400 Utilities 501 Banks 502 Insurance 503 Other Financials

goods and consumerelectronics, including furniture,floor coverings, domesticappliances, housewares, leisureequipment, packaging, books,toys, clocks and watches Manufacturers and distributors ofclothing, footwear andaccessories Food processors & wholesalers,including tobacco products &plantations, and beverageproducers Companies engaged in health &personal care business, such asoperation of hospitals & clinics,manufacturing and distribution ofdrugs, eye care products,biotechnology products andpersonal hygiene products Companies engaged in farmingand fishing business General retailers of consumergoods not classified elsewhere Hotel operators andmanagement companies;providers of entertainmentservices, including leisurefacilities, photographic servicesand equipment Companies engaged inbroadcasting & publishingactivities and other relatedbusinesses, including advertisingcompanies Providers and operators of allkinds of transportation servicessuch as airlines, air freight, rail,roads and terminal facilities,including logistic services Providers of non-financialservices to commercial orconsumer sectors not classifiedelsewhere (e.g. education,employment, cleaning, deliveryservices, funeral services andsourcing & supply chainmanagement solution providers) Operators of telecommunicationnetworks

60 Properties & Construction

601 Properties 602 Construction

- Distributors of electricity, gas andwater, and related businessesnot classified elsewhere - Banks providing a wide range offinancial services to retail &commercial sectors - Insurance companies includingbrokers and agencies - Financial service providersexcluding companiescategorised as banks andinsurance companies - Companies owning anddeveloping properties, propertyagencies - Producers & wholesalers ofbuilding

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70 Information Technology

701 IT Hardware 702 Software & Services 703 Semiconductors

80 Conglomerates

800 Conglomerates

materials; constructorsof commercial & residentialbuildings and providers ofservices to constructioncompanies Manufacturers and distributors ofcomputers, associatedequipment & accessories; andproducers of telecommunicationequipment Providers of computer services,including Internet services and ITconsultation Companies engaged in themanufacturing and distribution ofsemiconductors andsemiconductor equipment Diversified companies engagedin three or more businessesclassified in different sectors witheach business contributing morethan 10% but not substantially toturnover

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VI. Comparison of the Philippine and Hong Kong Capital Markets

For the past years or so, we have seen substantial growth in both the volume of domestic capital markets business in Hong Kong and the volume of international capital markets business involving Hong Kong as the principal financial center. The market has expanded in an environment of generally stable or declining interest rates and excess liquidity. The products offered by the Hong Kong Stock Exchange had become the main source of Hong Kongs progress. The Hong Kong stock exchange has been continuously creating a new market structure that is fair to achieve higher efficiency, cost reduction, better risk management including the development of new products and services, thereby improving the competitiveness of the market. It had maintained and promoted the fairness, efficiency, competitiveness, transparency and orderliness of the securities and derivatives industry to provide protection for investors. The Hong Kong regulatory agencies nonetheless carries responsibility towards the securities and debt industry in order to provide a favorable environment in the industry and a level playing field for its market participants together with adequate regulation to ensure as far as possible, sound business standards and confidence in the institutional framework. Over the past decades, a number of measures have been taken by the Hong Kong regulatory agencies to promote the development of its capital market. Unlike the Hong Kong Stock Exchange, the Philippine Stock Exchange still lack innovative and diversified financial products in the market which leaves investors and intermediaries with very limited investment choices and narrow investment opportunities. As compared to the Hong Kong Exchange, the Philippine Stock Exchange had lesser number of financial instruments being offered in the market. Even though Philippine Stock Exchange has been developing new financial products for some time, it is still lagged behind as compared to the other Exchanges. In terms of the Equity market, Hong Kong and Philippines seemingly offer same types of instruments. On the bond market, Hong Kong offers a wider range of debt instruments compared to the Philippines. Hong Kong also issues different kinds of derivatives which serve as a tool for their indices. The Philippine government mostly acquire its funds from issuing Treasury Bills which is considered as one of the most common type of debt instrument in the Philippines.

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According to the World Economic Forum 2010 financial reports, Hong Kong achieved an overall ranking of third among the other countries in terms of its ability to develop financial mechanisms that allow companies to secure funds from debt issuances. This only shows that Hong Kong nonetheless has been consistent and efficient in using their financial instruments as a way to promote investments in its capital markets. But in contrast to Hong Kongs strong equity market, its bond market development still remains slightly undeveloped and represents an additional area for improvement. On the other hand, the Philippines ranked 50th among the 57 countries. The Philippines lags far behind Hong Kong in terms of developing its capital markets. Hence, the implementation of a wider array of financial products would stir a great impact in Philippines capital market activity through creating greater market depth, breadth and liquidity. Other than these benefits, it will also enable the market to better satisfy investors diversified appetite for risk. Despite all the impediments, the countrys improvement in fiscal and economic side still makes its issuances an increasingly attractive investment option. The stock market took on increasing importance in the late 1980s. In the five-year period beginning in 1987, total market capitalization grew from $3 billion to $14 billion. The stock exchange is owned by its 185 brokerdealer members. Their representatives control the PSE board of directors. Because there is equal voting power among dealers, the more numerous small brokers tend to control board decision-making. Since the 1980s, emerging stock markets have been widely seen as the most exciting and promising area for investment, especially because they are expected to generate high returns and to offer good portfolio diversification opportunities. Consequently, these markets have known a considerable expansion. Indeed, financial liberalization has been largely implemented in several emerging countries through ongoing structural adjustment programs. As a prerequisite to the financial liberalization processes, stabilization policies have been designed to ensure macroeconomic stability, low inflation and reduced budget deficits. As a result, emerging market capitalization has grown from 4% of world market capitalization in 1987 to 13% in 1996 and was around 20% in 2000 in Philippines. A large number of Asian emerging markets have launched a series of reforms in the last few years, including the modernization and liberalization of their markets. As a result of these developments and of the important consequences of financial liberalization on International capital budgeting and investment, the integration of the Asian stock market has emerged as an important body of literature. However, the intensity and efficiency of these reforms differ from one country to another.

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For cultural and historical reasons, the Philippines are probably the most welcomingcountry of the Asian region for the western businessman. The Philippines trade openness ratio reached an average of 119% over the last decade. This is essentially due to the good functioning of the ASEAN (Association of South-East Asian Nations) created in 1965 by five countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand). In order to promote its integration into other international stock markets, the Philippines market has recently undergone several reforms: liberalization and privatization (since 1985), introduction of American Depository Receipts (ADR) and country funds (1989). Therefore, the Philippine stock market is expected to be better integrated during the post-liberalization period than it was during the period prior to the opening of its market.

Additional Analysis:

THE PHILIPPINE FINANCIAL MARKET

STRENGTH: STRONG FINANCIAL SYSTEM

The Philippines economic and financial systems have continually been one of the strongest in the world and one of the top few in Asia for quite some time. Like all industries and economies, their financial system has had its share of declining states as well, however the Philippines has consistently been a strong market in Asia. The current Filipino financial system has been in place for the last 73 years and is constantly and consistently growing. It has shown that it can sustain terrible recessions like the one it felt in the late 90s and has been holding steady during this current recession, relative to other comparable Asian markets. The Philippines has been labeled by Goldman Sachs as one of the next 11 countries because it has a rapidly growing economy backed by a rapidly strengthening financial system. The idea that the Philippines could easily emerge from this economic recession as the number one country in Asia is a growing possibility and is very real.

Contributory Statistics:
 Currently ranks as the 47 largest economy in the world  GDP (nominal) as of 2008 was over $166 Billion dollars  Switch from mostly agricultural country to a manufacturing and service
th

economy

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 Philippines have been hit incredibly less hard than its Asian counterparts due

to conservative spending, large remittances from four-to five-million overseas Filipino workers; and a growing business process outsourcing Industry.  Steady growth of their 2 main stock markets (Philippine Stock Exchange and the Philippine Dealing Exchange.  Steady unemployment rate (7.5%) WEAKNESSES:
   

Financial instability Financial transparency Lack of sources of credit High loan rates

 Lack of bank credit  Relying on external financing  Trade burdens

THE HONG KONG FINANCIAL MARKET

STRENGTHS: 1. Higher Efficiency of Technology and Globalization Higher efficiency and faster telecommunications enable markets to cut out the intermediary by connecting the consumer directly with the producer. Technology makes the past obsolete, destroying old franchises and creating new value. What Hong Kong can do today, someone with access to Internet can do tomorrow with the higher speed and at lower costs. The development of global financial markets depends heavily on the availability of efficient telecommunications and a robust technological platform. Hong Kong has the potential of being the first to exploit the true benefits of seamless global financial trading, where global financial products can be traded, cleared and settled at the lowest transaction costs and the lowest trading and settlement risks. 2. Mature and Active Foreign Exchange Market and Derivatives Market Hong Kongs foreign exchange and derivatives market is the eighth largest in the world. With more than 75% of trading between foreign currencies other than the Hong Kong dollar, and about 70% of turnover done with forex dealers abroad, our forex market is clearly outward-looking. The development of forex has been simulated by the absence of exchange controls in Hong Kong and its favourable time zone location. 3. Developing Debt Market Under careful but step-by-step nurturing, particularly through the creation of a benchmark yield curve and an efficient infrastructure, it resulted

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into developed debt market in Hong Kong which is one of the most liquid in Asia. With the institutionalization of savings in Hong Kong through the introduction of Mandatory Provident Fund schemes and the securitization of bank assets such as home mortgages through the creation of the Hong Kong Mortgage Corporation, the debt market is poised to take off. 4. Improving Transparency and High Prudential Standards A major role of an international financial centre is to enable investors to manage their risks and efficiently allocate their resources. Sophisticated investors today seek to manage their assets and liabilities in those markets that offer the highest returns with lowest risks/volatilities. To do this effectively, they will need superior information, and they will be looking at the standards of prudential regulation and the degree of integrity and transparency in the financial markets. Hong Kong has the highest standards of transparency in Asia. They have a vibrant free press, a high concentration of regional and international press, television and news distribution centres here and high standards of accounting disclosure. For example, the Government will establish an on-line Government Electronic Delivery Service scheme to allow 24-hour access to government services and information. As in the case of transparency standards internationally, it is not so much whether or not disclosure standards are high or low, but whether the existing standards are more closely implemented and enforced. We will be working with the professional bodies and the corporate sector to see how we can improve transparency across the board.

WEAKNESSES: 1. Weak Domestic Financial Sector In the case of Hong Kong, the commercial banking, investment banking, securities business, insurance and fund management sectors are all dominated by foreign firms. Foreign banks, except a few which have strong roots in Hong Kong, e.g. Hong Kong Bank and Standard Chartered Bank, have less commitment to the local economy. There is a rapid withdrawal of foreign financial institutions under economic and financial crisis. This would render the Hong Kong financial system vulnerable. There is insufficient local financial interest and capability to stand against another major external shock or speculative attack. At that time, foreign banks and other financial institutions would either take part in the speculation as well or just be bystanders. 2. Too much reliance on Property Sector The commercial banks extended more than 51% of loans to the property sector directly. These include mortgage lending, and lending to

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property and construction companies. If the portion of other lending secured by real estate and property shares is also taken into account, the proportion of lending directly and indirectly related to the property sector will be higher. Similarly, the securities industry is also heavily loaded with property shares. It is estimated that the property sector accounts for more than 40% of the market capitalization. Thus, property sector dominated the commercial banking lending and securities market. 3. Growing Dependence on the China Factor The operations of some China-related companies in Hong Kong are quite dubious and their financial accounts are not reliable. There is a distinct risk that further collapses of a few major China-related companies would trigger a systemic risk to the stability of the banking sector. 4. Outdated Regulatory System Recently, UK, Australia and Canada have all overhauled or are in the process of re-designing their financial systems. They have explored the necessary regulatory changes in response to the challenge of the next century. The global financial system will undergo drastic changes, including: (i) more competition; (ii) globalization and conglomeration; and (iii) financial services becoming market-instrument based rather than deposit based. Hong Kong's regulatory framework is not sufficiently forward looking and has problems against competition. It is still following the traditional mode of institutionally-based regulation rather than functionally-based. The Hong Kong government has no plan to overhaul the entire financial system yet.

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Sources
Capital Markets in the Philippines http://www.tradechakra.com/economy/philippines/capital-markets-in-philippines245.php Equity Securities http://www.hkex.com.hk/eng/global/faq/equity%20sec.htm GEM Growth Enterprise Market http://www.chinadetail.com/Business/GEM.php Hang Seng Index http://finance.yahoo.com/echarts?s=^HSI+Interactive#chart1:symbol=^hsi;range= 1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;sour ce=undefined HKEx Monthly Market Highlights - January 2011 http://www.hkex.com.hk/eng/stat/statrpt/mkthl/mkthl201101.htm Hong Kong Stock Exchange http://asia.advfn.com/StockExchanges/history/HKSE/HongKongStockExchange.h tml Hong Kong Attracts More Foreign Investment http://english.peopledaily.com.cn/english/200101/02/eng20010102_59412.html Hong Kong: The Facts http://www.gov.hk/en/about/abouthk/factsheets/docs/financial_services.pdf Red Chip http://www.investopedia.com/terms/r/redchip.asp The Hong Kong Capital Markets Association http://www.hkcma.org/ What are Government Bonds? http://www.hkgb.gov.hk/en/investor/what.html

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