Memorandum submitted by the London Stock
Exchange
"IMPACT OF CHINA ON THE WORLD AND UK
ECONOMY"
The London Stock Exchange is one of the world's
foremost equity exchanges and a leading provider of services that
facilitate the raising of capital and the trading of shares. The
London Stock Exchange is the most international equities exchange
in the world and has Europe's largest pool of investment funds
and liquidity. The market capitalisation of UK and international
companies on the London Stock Exchange's markets is £3.5
trillion, with £4.7 trillion of equity business transacted
in 2004.
BACKGROUND
1. One of the City of London's greatest
strengths in recent years has been its ability to attract investors
and firms from high growth markets overseas. The London Stock
Exchange has 461 international companies from 58 countries listed
and traded on its markets[7]and
allocates significant resources to attracting new companies to
list in London. We therefore welcome the Committee's inquiry on
the impact of China on the world and UK economy, in particular
the commitment of the Government to expand the China-UK financial
dialogue with enhanced private sector participation.
2. It has been predicted that China will
become the largest economy in the world by 2041[8]and
we believe there are significant opportunities for the London
Stock Exchange and UK financial services companies to share in
China's economic development. In addition to the ongoing privatisation
programme of many state owned enterprises (SOE) there is increasing
scope for offering secondary listings to large private companies
looking for additional growth capital to expand their operations
and heighten their global visibility. Looking ahead, the strong
growth in small and medium sized enterprises in China promises
a pipeline of new companies that will be looking to attract international
capital over the next decade.
3. Not only do Chinese companies benefit
from listing in London, British firms and investors also benefit.
As more Chinese companies list in London, European investors will
have exposure to this high growth market. Each Chinese company
that lists in London also stimulates demand for services for which
the City of London has an international reputation including legal
services, banking, accountancy and Public Relations.
LONDON STOCK
EXCHANGE—ACTIVITIES
IN CHINA
4. China is a key market for the London
Stock Exchange and is one of our target markets alongside India
and Russia. We were the first major Exchange to sign a Memorandum
of Understanding (MoU) with the Shanghai Stock Exchange in 1994
followed by an agreement with the China Securities Regulatory
Commission in 1996 which allowed Chinese stocks to be listed in
London for the first time. We currently have 6 Chinese companies
listed[9]with
a market capitalisation of £6.3 billion, including Air China
which listed in December 2004.
5. As Chinese companies listing internationally
usually also list in Hong Kong, we are able to take advantage
of the legal and regulatory similarities we have with the Hong
Kong market to attract Chinese companies to London.[10]
Air China was able to list in both markets in December using a
single prospectus (see paragraph 10).
6. The London Stock Exchange has undertaken
many high level visits to China in the past year, developing our
relationships with the Chinese Government, businesses, advisers,
stock exchanges and regulatory authorities. Last year our Chairman,
Chris Gibson-Smith; Chief Executive, Clara Furse; Director of
Market Services, Martin Graham and Head of International Business
Development, Tracey Pierce, all took part in conferences in China
and we recently opened an office in Hong Kong as a centre for
our business development in China and the rest of Asia.
7. The London Stock Exchange's newly established
Training and Consulting division has also focused on China, meeting
with Government bodies, regulators, financial institutions and
exchanges as part of a China Britain Business Council visit in
late 2004. The Exchange provides training on the operation of
financial markets and has identified a need for this knowledge
in China. We also provide Capital Markets consulting services
and we have a good relationship with the Shenzhen Exchange having
entered into a Memorandum of Understanding with them in January
2004. As a result we have provided expert speakers on investor
relations for issuer conferences organised by the Shenzhen Exchange.
We are grateful to Her Majesty's diplomatic staff in China who
have been particularly helpful in advising us on how to approach
potential audiences for our Training and Consulting services.
NEW ASIA-PACIFIC
OFFICE
8. Our Asia-Pacific office was opened in
October 2004 and is located in the International Financial Centre
in Hong Kong. The office was opened by our Chairman, Chris Gibson-Smith,
Henry Tang, Financial Secretary of the Hong Kong SAR and the Lord
Mayor of London. The Exchange's regional office will be targeting
large privatisation deals and other medium to large enterprises
in China as well as other non-state owned businesses.
9. Hong Kong was chosen as our base in the
region because it is recognised as a centre of the international
financial markets in Asia whilst at the same time providing direct
access to the Chinese mainland. The unique position of Hong Kong
and its legal, regulatory and historic links with the UK offer
British firms a number of important advantages such as language,
business culture, transparency and international outlook.
AIR CHINA
LISTING
10. In December 2004 we were delighted to
welcome Air China to London for its international listing. Air
China is China's premier airline and flag carrier.
11. Air China was able to use a single prospectus
for its listings in London and Hong Kong due to the similar regulatory
environments in the two financial centres. Using a single prospectus
saves companies both time and money and makes achieving a dual
listing in Hong Kong and London easier than many companies imagine.
We believe that the single prospectus offers a blueprint for other
Chinese companies seeking to list overseas and raise investment
capital and we anticipate further companies following this lead.
To mark the occasion Mr. Shixiang Wang, Vice Chairman of Air China
opened the London Stock Exchange's markets, accompanied by His
Excellency Mr Zha Peixin, Chinese Ambassador to the United Kingdom.
12. Air China sold 2.8 billion shares, or
31% of its equity in its flotation. Due to heavy demand from individual
retail investors, the public portion of the float was lifted to
40% of the total offering from 10%, after it was oversubscribed
83 times. Demand from institutional investors was also high. Institutions
placed orders for 37 times more shares than were available.
STATE-OWNED
ENTERPRISES (SOES)
13. In China, there are almost 200 large
stated-owned enterprises (many of these are our targets), which
are direct subsidiary companies of the Central government body
called the State-owned Assets Supervision and Administration Commission
or SASAC. State-owned enterprises are also owned by major ministries
and provincial governments.
14. In recent years Chinese SOE's listing
overseas have generally favoured the US market and there is a
perception that the United Kingdom could have done more to market
itself. We are now devoting more resources to China as we believe
there are some very real advantages for Chinese firms listing
in London. In particular, access to international and institutional
investors based in London.
15. According to International Financial
Services London, London is the largest centre worldwide in the
provision of privatisation advice.[11]
London has developed expertise in privatisation, initially from
the UK being the first country to pioneer a systematic privatisation
programme. Over 60 companies valued at over £70 billion were
privatised in the UK in the 1980s and 1990s[12]
THE LONDON
MARKET—AN
INTERNATIONAL FOCUS
16. The UK is one of the top two centres
for fund management in the world with almost £3 trillion
in funds under management. London is also the world centre for
trading international equities with 45% of trading taking place
in London compared with just 22% for New York.[13]
London also has a more institutionally-focussed investor base
than New York, with a higher proportion of long-term, professional
investors with an international outlook.
17. London has internationally respected
standards of market regulation and corporate governance, offering
opportunities for firms from emerging markets to demonstrate their
international credentials and increase investor confidence. In
addition the UK has built up a valuable base of experience in
professional advisory services, legal services, accountancy, banking
and broking which is an important asset when marketing abroad.
Financially, the UK recorded the largest surplus on trade in financial
services of any country in the world with $22.8 billion in 2002.[14]
WORLD LEADING
REGULATORY STANDARDS
AND CORPORATE
GOVERNANCE
18. The US and the UK have adopted different
approaches to financial regulation and corporate governance. UK
Corporate Governance is principles based (ie comply or explain)
whereas US regulation is more prescriptive and has become increasingly
so recently. We believe that our principles based system is more
attractive for overseas firms because it enables companies to
combine equivalent standards with a more flexible, less prescriptive
approach.
19. After a series of corporate financial scandals
the US introduced the Sarbanes-Oxley Act (SOA) in 2002. The Act
sought to increase public confidence in US capital markets and
imposed new duties and penalties for non compliance on companies
and their executives. However, there has been mounting disquiet
from overseas companies about some of the provisions of the SOA
and many firms are reported to be re-considering their US listings.
20. For Chinese companies the ability to demonstrate
world leading standards of governance is key to attracting funds
from western investors and gives them the competitive edge over
less transparent rivals that cannot show similar commitments.
Increased exposure to UK governance standards can also lead to
greater awareness of governance issues in home markets.
21. We have been encouraged that Chinese regulators
have taken the corporate governance agenda increasingly seriously
and have improved regulation to make Chinese companies more attractive
to investors. For example, the Chinese Code of Corporate Governance,
issued in December 2002, states that at least a third of company
boards must comprise independent members[15]
and in October 2003 new rules were published requiring companies
to change external auditors at least every five years[16]
LONDON'S
CHOICE OF
PROVEN MARKETS
22. We are unique among major international
financial centres in providing a choice of differentiated markets
suited to the needs of different types of companies. Our Main
Market supports the capital raising activities of more established
companies whilst AIM, which has no direct peers, supports the
capital raising of smaller, growing companies and is developing
an increasing international profile. We have received interest
in both markets from Chinese companies and on 1 October 2004 we
welcomed China Wonder to AIM, which became our first company with
substantial Chinese assets.
LOOKING AHEAD
23. We are grateful to the Government, Parliament,
Chambers of Commerce and the Corporation of London for the work
that they have done promoting UK financial services overseas.
Their support has been invaluable as a number of our competitors
are also targeting China with high level trade delegations.
24. For British business to compete in China
on an even footing with the US and other European countries it
is essential that they can count on support from Government at
the very highest level. Given that UK financial services provide
the largest financial services trade surplus in the world, the
Government should take all available opportunities to promote
UK financial services overseas, including the benefits of the
City of London as a place to do business and the attractiveness
of UK corporate governance standards.
25. We warmly welcome the increased Government
focus on China and we hope to be able to play our full part in
attracting more Chinese companies to the United Kingdom.
18 January 2005
7 Source: London Stock Exchange, January 2004. Back
8
Goldman Sachs, Global Economics Paper No: 99. Back
9
Air China £569.244 million; China Petroleum & Chemical
Corp £4087.89 million; Datang Intl Power Generation £572.293
million; Jiangxi Copper Co £368.207 million; Zhejiang Expressway
Co £ 533.026 million; Zhejiang Southeast Electric Power £130.251
million (figures correct as of January 2004) Back
10
Hong Kong listing rules are based on UK listing rules. Back
11
Source: IFSL, Privatisation: UK Expertise for International
Markets, January 2003. Back
12
Source: IFSL, International Financial Markets in the UK,
November 2004. Back
13
Source: IFSL, International Financial Markets in the UK,
November 2004 (figures are from 2003). Back
14
Source: IFSL, International Financial Markets in the UK,
November 2004. Back
15
Source: Economist Intelligence Unit, Corporate Governance
in China, August 2004. Back
16
Source: Economist Intelligence Unit, Corporate Governance
in China, August 2004. Back
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