Hong Kong Exchanges & Clearing Markets

Market Analysis

FIN 433 – Financial Markets and Institutions

Submitted to Muhammad Nasiruddin (MN)

Submitted by
Name ID
Mohammed Arafat 1811210030
Ritu Swarna Roy 1811890030
Navid Ishtiaque Khan 1812421030
Abdullah Akif Akhond 1812824030
 Overview

The report illustrates a study conducted on one of the major global financial markets

in the world, the Stock Exchange of Hong Kong, with an aim to learn about the market and

its importance in the economy of the country.

The report consists of a brief market synopsis followed by discussion about the assets

traded on the market and how it has changed over time. The report delves into the market

indicators and evaluates the trade volume, market capitalization, and their growths over the

past 5 years. The values are further analyzed to determine the market trend. Next, the report

introduces the major players and their contribution in HKEx. The behavior of the market

towards small and individual investors is also explained. The report elaborates the importance

of the market in the economy of the region using the market capitalization to GDP value. For

better evaluation of the market’s performance, a comparison has been conducted with the

largest stock market in China, Shanghai Stock Exchange. Number of assets, trade volume and

market capitalization was taken into consideration for the comparison. The adequacy of level

of information provided on the market was also assessed. Lastly, the efficiency and liquidity

of the market was reviewed. The report was concluded with a summary of the main findings.
 Table of Contents

Introduction ............................................................................................................................ 2

Market Synopsis ..................................................................................................................... 3

Assets traded on the Hong Kong Stock Exchange ................................................................. 5

List of type assets offered in HKEX ................................................................................... 5

History of Asset trading on the Hong Kong Stock Exchange ............................................ 6

Market Indicators: Trade Volumes, Market Capitalization and Growth ............................... 8

Major players on the market................................................................................................. 12

Is the market friendly to the small and individual investors? .............................................. 13

The role of Hong Kong Stock Exchange in the economy of Hong Kong and China .......... 14

Stock market capitalization as percent of GDP - Hong Kong SAR, China ......................... 16

Comparison between Hong Kong Stock Exchange and Shanghai Stock Exchange ............ 18

Asset Traded ..................................................................................................................... 18

Trade volume (USD Billion) ............................................................................................ 19

Market Capitalization (USD Trillion) .............................................................................. 20

The importance of Hong Kong stock market in global context ........................................... 22

Level of information provided on the market ...................................................................... 24

Efficiency and Liquidity of Hong Kong Stock Exchange.................................................... 25

Conclusion............................................................................................................................ 26

References ............................................................................................................................ 27

1
 1. Introduction

The report presents a study on one of the major stock exchanges in the world, the

Hong Kong Stock Exchange and Clearing. Hong Kong’s stock exchange is an interesting

market to study that will helps us develop an understanding on stock markets and its

movements.

The main objective of this report is to conduct an overall research and analysis on the

stock market of Hong Kong. The study focuses on the types and volume of assets traded in

the market, market capitalization and growth rates and the role of the market in the country’s

economy. By analyzing these market indicators, we aim to explain the current conditions of

the market, prevailing market trends and the factors driving them. Through comparative study

against a suitable benchmark, we hope to understand where our chosen market stands in the

global context. Besides, through this study we intend to learn how to analyze stock market

trends, interpret movements of values and understand what it indicates for the market and the

economy. All in all, this study aims to provide real world context to the theories taught

throughout the course.

The report is aimed primarily at students, researchers and small investors who would

like to get a comprehensive idea on how the stock market of Hong Kong has been performing

in the recent years in comparison to global leaders and the contribution of the market to the

country’s economy. This report will provide the investors researching into Hong Kong’s

stock market with a basic understanding of the market’s potential and help decide whether the

market is friendly for investment choices. However, major investment decisions cannot be

made solely based on this report.

2
 2. Market Synopsis

The Stock Exchange of Hong Kong is the third-largest stock exchange in Asia in

terms of market capitalization (behind Tokyo Stock Exchange and Shanghai Stock

Exchange). With 2,449 listed companies and a combined market capitalization of HK$38

Trillion, it ranks as the 7th largest stock exchanges in the world. The stock exchange is a

wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX).

The Hong Kong securities market can be traced back to 1866. However, the stock

market was formally set up in 1891 when the Association of Stockbrokers in Hong Kong was

established. It was renamed The Hong Kong Stock Exchange in 1914 (Hong Kong Securities

Market, n.d.).

The Stock Exchange of Hong Kong Limited was incorporated in 1980 and trading on

the exchange finally commenced on 2 April 1986. At that time, a total of 249 companies were

listed on the Exchange and total market capitalization was HK$245 billion.

Since 1986, a number of major developments have taken place. The 1987 market

crash revealed flaws in the market and led to calls for a complete reform of the Hong Kong

securities industry. This led to significant regulatory changes and infrastructural

developments. As a result, the Securities and Futures Commission (SFC) was set up in 1989

as the single statutory securities market regulator. On 24 June 1992, the Central Clearing and

Settlement System (CCASS) is introduced. On 1 November 1993, a new "Automatic Order

Matching and Execution System", AMS/1, was launched on the exchange; later, in January

1996, the second phase AMS/2 was initiated, becoming the basis of off-floor trading (History

of HKEx and its market, 2018).

3
 In respect of market and product development, the first derivative warrant was listed

in February 1988. The Tsingtao Brewery became the first Chinese enterprise to list its H

shares on the exchange on 15 July 1993. Regulated short selling and stock options was

introduced in January 1994 in September 1995 respectively.

In November 1999, the exchange introduced the Growth Enterprise Market (GEM) to

provide fund raising opportunities for companies from all industries, and to promote the

development of technology sector.

On 6 March 2000, The Stock Exchange, Futures Exchange and the Hong Kong

Securities Clearing Company all became wholly owned subsidiaries of HKEx, which was in

turn listed on 27 June 2000.

4
 3. Assets traded on the Hong Kong Stock Exchange

Activities conducted by HKEX-

• Listing – HKEX is a world- leading capital raising venue for Hong Kong, Mainland

China and international issuers. They also act as frontline regulator for companies

listed in Hong Kong.

• Trading – A wide range of products are traded in HKEX including ETFs, REITs,

Bonds etc.

• Clearing – HKEX offer a vertically integrated solution in all of the markets in Hong

Kong, act as the clearing house and settlement system for on-exchange and certain

over the-counter transaction.

3.1 List of type assets offered in HKEX

SECURITIES LISTED DERIVATIVES OTC DERIVATIVES

Equities Equity Index Eligible OCT clear product

Exchange Traded Products Single Stock Interest Rate Swaps
Derivative Warrants Foreign Exchange Non Deliverable Forwards
Inline Warrants Interest Rate Cross Currency Swaps
Callable Bull/Bear Contract Commodities Deliverable FX
Real Estate Investment Trust
Debt Securities

No. Listed Companies – 2449

5
 3.2 History of Asset trading on the Hong Kong Stock Exchange

Securities market

Trading securities started in Hong Kong back in the mid-19th century. However,

the first formal market, the Stockbrokers' Association of Hong Kong, was established in

1891 (HKEdu, 2007). In 1914 it was renamed to Hong Kong stock exchange by the

association.

In 1921 the second exchange, the Hong Kong Stockbrokers' Association was

incorporated. The two exchanges merged to form the Hong Kong Stock Exchange in

1947 and re-establish the stock market after the Second World War.

The fast growth of the Hong Kong economy led to the establishment of 3 more

exchanges- the Far East Exchange in 1969; the Kam Ngan Stock Exchange in 1971; and

the Kowloon Stock Exchange in 1972.

The pressure to strengthen market regulation and to unify the four exchanges led

to the incorporation of SEHK, 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 merger with HKFE in March 2000, the unified stock exchange had 570 participant

organizations.

In 1989 Hong Kong Securities Clearing Company Limited was incorporated. It

created the central clearing and settlement system (CCASS), which started operating in

1992 and became the central counterparty for all CCASS participants.

The clearing operation is based on the immobilization of share certificates in a

central depository. Share settlement is on a continuous net settlement basis by electronic

6
book entry to participants' stock accounts in CCASS. Transactions between CCASS

participants are settled on T+2, the second trading day following the transaction.

Derivatives market

Established in 1976, the Hong Kong Commodity Exchange (the predecessor of

Hong Kong Futures Exchange Limited) is a derivatives leader in the Asia-Pacific region.

The items that were traded were cotton futures, sugar futures, soybean futures, and gold

futures. In May 1985, it was renamed Hong Kong Future Exchange.

HKFE provides efficient and diversified markets for trading futures and options

contracts by its more than 160 participant organizations, including many that are affiliated

to international financial institutions. The derivatives market under HKEX trades a broad

range of products, including equity index, stock, and interest rate.

OTC Clearing Hong Kong Limited (OTC Clear) was incorporated as a subsidiary

of HKEX in May 2012 for the purpose of acting as the clearinghouse for OTC derivatives

in Hong Kong. OTC Clear started offering OTC derivatives clearing services in

November 2013.

7
 4. Market Indicators: Trade Volumes, Market
Capitalization and Growth
Market Capitalization
Year Annual Trade Volume Growth Growth
(HK$ billion)
2015 $ 468,140,226,100.00 14% 23,890.50 -9.98%
2016 $ 413,571,512,500.00 13.19% 24,713.20 3.44%
2017 $ 454,931,180,700.00 10% 33,998.80 37%
2018 $ 495,739,599,900.00 9% 29,909.40 -12.02%
2019 $ 413,392,053,300.00 -17% 38,165.00 27.60%

Source: (HKEX, 2019) (HKEX, 2018) (HKEX, 2017) (HKEX, 2016) (HKEX, 2015)

TRADE VOLUME 2015-2020

$474.91

(BILLION HK$)
$359.01

$313.93
$240.70
$239.97
$231.24
$195.16

$195.05
$192.59

$178.88

$175.14
$161.52

$158.23

$154.40

$144.38
$138.16
$133.02

$131.05
$129.11
$128.62

$128.60

$125.53
$123.34

$121.90

$121.74
$121.08

$120.74

$118.49
$117.22
$115.15
$113.45
$113.14

$112.73
$112.11
$111.39

$111.48
$103.99
$102.69

$102.17
$101.67
$99.81

$99.11

$98.64
$91.32
$90.88

$90.37
$90.14

$89.67
$87.49

$84.94

$82.85
$82.11
$79.89

$79.07
$74.64
$72.91

$68.50

$67.44
$64.81
$59.95
$50.59

$50.36

$47.78

$3.21
SEP-15

SEP-16

SEP-17

SEP-18

SEP-19
MAY-18
MAY-15

MAY-16

MAY-17

MAY-19
JAN-15

NOV-15
JAN-16

NOV-16
JAN-17

NOV-17
JAN-18

NOV-18
JAN-19

NOV-19
JAN-20
MAR-15

MAR-16

MAR-17

MAR-18

MAR-19

MAR-20
JUL-15

JUL-16

JUL-17

JUL-18

JUL-19

Fig: Graphical presentation of monthly trade volume of HKEx (Jan 2015 – Mar 2020)

Trade Volume Growth

20% 14% 13.19%
15% 10% 9%
10%
5%
0%
-5%
-10%
-17%
-15%
-20%
2014 2015 2016 2017 2018 2019 2020

Fig: Graphical presentation of annual trade volume growth (2015 - 2019)

8
 Over the last 5 years, we observe fluctuations in the volumes of assets traded in Hong

Kong Exchanges and Clearing Market. Local stock prices showed sharp oscillations during

2015. Although 2015 started off with the Hang Seng index reaching its climax in the last 7

years, owing to the spike in Greek debt crisis and fear about the negative spillovers of US

interest rate hikes, its value dropped with trading volume coming down in the fourth quarter.

The local stock market remained volatile in 2016. Local stock prices faced constraint

during the early months of the year. However, encouraged by delays in US interest rate hikes,

unexpectedly positive effect of Brexit and the approval of Shenzhen-Hong Kong Stock

Connect implementation plan, stock prices recovered during the second and third quarters

showing an increase in trade volume. As US interest rate hiked up in December, 2017 began

with a drop in trade volume. By the end of 2017, the local stock market saw a strong rally as

investor sentiment turned more bullish amidst the brightened global economic outlook and

receding external risks (Hong Kong Economy, 2017). This reflected on the soaring amount of

trading volume.

Both local stock prices and trading volume gradually declined since the second

quarter of 2018 majorly because of US-Mainland trade tensions and concerns about US

interest rate hikes. The Hang Seng Index ended the year with a significantly lower value as

well. Trade growth dropped as market became unstable amidst protests and political unrest.

9
 HKex Market Capitalization
(HK$ Billion)
50000
40000
30000
20000
10000
0
2015 2016 2017 2018 2019

Market Capitalization

Fig: Graphical presentation of Market capitalization (2015 – 2019)

Market Capitalization Growth Rate

40.00%
37%
30.00%
27.60%
20.00%

10.00% 10.90%
3.44%
0.00%

-10.00% -9.98%

-20.00%
2014.5 2015 2015.5 2016 2016.5 2017 2017.5 2018 2018.5 2019 2019.5

Fig: Graphical presentation of market capitalization growth rate (2015 - 2019)

2015: In the beginning of 2015, the Hang Seng Index soared up in April to reach its

highest in the last 7 years (Hong Kong Economy, 2015). However, soon the economy faced a

downturn. The Hong Kong economy grew at its lowest pace in the last 4 years with only

2.4% growth. In fact, the global economy experienced the slowest growth since 2009. The

heightened financial volatility posed a severe drag on global trade, thereby dampening Hong

Kong’s exports (Hong Kong Economy, 2015). Many industries such as tourism faced a

downturn in that year; this was reflected in the Stock Exchange with a decline in Market

Capitalization in that year.

10
 2016: The Hong Kong Economy performed well and accumulated a budget surplus of

HK$92. This was possible due to higher than expected revenue from the land sales. The Hang

Seng Index also stabilized, finishing 2016 almost flat from a year earlier even amidst

renewed concerns over imminent US interest rate hikes (Hong Kong Economy, 2016).

However there was 1.9% economic growth in that year, hence a small growth can also be

seen in the Market Capitalization of the HKEx.

2017: This year, Hong Kong’s economy grew its highest pace in the last 6 years.

Owing to active regional trade flows, exports of services saw a broad-based turnaround;

inbound tourism experienced a sustained recovery and cross-border financial activities

expanded (Hong Kong Economy, 2017). This was reflected in the stock exchange with a

massive rise in the Market Capitalization.

2018: The year began with a stable growth compared to the last year as there wasn’t

any major political issue in the country. However, with increasing external uncertainties

especially those originating from the US-Mainland trade conflict and US interest rate hikes,

the momentum of growth soon decelerated. The Hang Seng Index closed the year with 22.0%

lower than its peak in January (Hong Kong Economy, 2018).

2019: Hong Kong economy saw a recession due to an on-going pro-democracy

protest and the trade war between Beijing and Washington hit the export-heavy economy

hard (Hong Kong fell deeper into recession at end of 2019, 2019). However, despite the

turbulent economy, the city's financial markets appeared to be sustaining quite well. The

Hang Seng Index (HSI) rose 4% and the political crisis hasn't yet been a deal breaker for

investors, many of whom still believe the city to be an important gateway to business in Asia.

This was clearly reflected in the rise in market capitalization even amidst such uncertainties.

11
 5. Major players on the market

Market Capitalization
# Name Type
(Billion HK$)
1 Tencent $ 3148.98 Internet Based
2 ICBC $ 2212.315 Banking & Finance
3 China Ping An Insurance Group $ 1765.14 Insurance & Finance
4 CCB ( China Construction Bank) $ 1619.2075 Banking & Finance
5 China Mobile (Hong Kong Ltd) $ 1300.99 Telecom

Source: (Top HKEx Stock Exchange Companies by Market Capitalization, 2019)

Tencent Holding Ltd – The biggest player in Hong Kong stock market is a Chinese

multinational conglomerate holding company specializing in various internet-related products

and services, entertainment, AI and technology. It is also the largest video gaming company

in the world and is the only Asian tech company to reach the market valuation mark of

US$500 billion in 2018 (Tencent Holdings Market Cap, 2018).

ICBC (Industrial and Commercial Bank of China Ltd) – China’s state-owned

commercial bank, ranked the largest bank in the world 2017 and 2018 by total assets

(US$4027.44 billion). ICBC ranked 1st in The Banker's Top 1000 World Banks ranking in

the consecutive years 2012 to 2019 and also ranked 1st on the Forbes Global 2000 list of the

world's biggest public companies 2019 (The World’s 100 Largest Banks, 2019).

China Ping An Insurance Group – A Chinese holding conglomerate that has

subsidiaries in insurance, banking and financial services. Considered to be China's biggest

insurer, Ping An ranked 7th on the Forbes Global 2000 list. Its market capitalization is at

US$220 billion in July 2019, making it the world's largest insurer except for Berkshire

Hathaway (China’s Biggest Private Sector Company, 2019).

12
 China Construction Bank – One of the ‘Big Four’ banks of China with a market

capitalization of US$198.28 billion and a component of the Hang Seng index. The bank made

an IPO on the stock exchange of Hong Kong in 2005 and in 2007 it made the second largest

IPO in (US$7.6 billion) on the Shanghai Stock Exchange.

China Mobile – A state owned telecommunication network that provides service in

whole of China. China Mobile is also listed in NYSE and it is the world largest mobile

network operator with a subscriber number of over 902 million as of 2018 and a market

capitalization of US$152.092 billion.

6. Is the market friendly to the small and individual investors?

The main market is mostly suitable for very large companies, hence small and

individual investors might find it quite risky. However, a third exchange is proposed to be

created in which new companies and start-ups will be able to list themselves. The new board

of HKEX has also relaxed the rules for listing in the stock exchange in order to attract

emerging companies in the market that do not meet all the requirements for being listed.

Although this decision was criticized by many market participants who believe it is not the

right way to diversify the exchange, HKEx appears to show friendly behavior towards small

businesses.

13
7. The role of Hong Kong Stock Exchange in the economy of
Hong Kong and China

As one of the world's leading international financial centers, Hong Kong's service-

oriented economy is distinguished by its low taxes, nearly free port trade, and well-

established international financial market. The Hong Kong dollar is legally issued by three

major international commercial banks, and often linked to the US dollar. Hong Kong's

individual banks set interest rates to ensure they are market oriented. There is no officially

established central banking structure, though the Hong Kong Monetary Authority acts as a

financial regulator. Hong Kong’s economic freedom score is 89.1, making its economy the

2nd freest in the 2020 Index.

Since the economic growth of the mainland, Hong Kong is no longer the undisputed

business and finance hub in the region. Yet, according to bankers, economists and business

leaders, it still plays an indispensable role that Beijing cannot undermine. Hong Kong

remains one of country’s key links to connect with global capital markets and plays a pivotal

role in the Mainland’s economic development.

China uses Hong Kong’s currency, equity and debt markets to attract foreign funds,

while international companies use Hong Kong as a launch-pad to expand into mainland

China. The bulk of foreign direct investment (FDI) in China continues to be channeled

through the city. “Connect” schemes that link the Hong Kong bourse with those in Shanghai

and Shenzhen also provide the main gateway for foreigners to buy mainland stocks.

Often as a springboard to global expansion, most of China’s biggest firms, from state-

owned Industrial and Commercial Bank of China (1398.HK), to private firms like Tencent

Holdings (0700.HK), have listed in Hong Kong. In 2018, Chinese companies raised $64.2

14
billion globally (almost a third of the worldwide total) through initial public offerings (IPOs),

however only $19.7 billion of that came from listings in Shanghai or Shenzhen (Refinitiv,

2018), in comparison to $35 billion in Hong Kong. Chinese firms have also exploited Hong

Kong’s debt market for 33% of their $165.9 billion in offshore U.S. dollar funding in 2018.

While port trade through Hong Kong has declined with China joining the World

Trade Organization, outbound Chinese investment in Hong Kong is substantial both in flow

and stock. According to the Ministry of Commerce of China, over 58 percent (around US$70

billion) of China’s nonfinancial outbound direct investment (ODI) flow went to Hong Kong

in 2018. By the end of 2018, stock volume of China’s nonfinancial ODI in Hong Kong

reached US$622 billion. The sum was around 170 percent of Hong Kong’s GDP in that same

year. Not a large amount of Chinese investments stay in Hong Kong. It is either repatriated to

China as revenues and funds or sent to other parts of the world. To reap the benefits of the

territory’s favorable regulatory framework and available professional services, mainland

companies take this kind of detour with their investments via Hong Kong.

The mainland companies detouring through Hong Kong include an increasing

presence of China’s state-owned enterprises (SOEs). According to Wind Financial

Information, of the 96 central SOEs, three are headquartered in Hong Kong (namely, China

Merchants, China Resources, and China Travel Service) and 50 have at least one subsidiary

listed on the Stock Exchange of Hong Kong (SEHK). The SEHK now houses 250 H-share

Chinese companies and another 171 Chinese state-controlled red chip firms.

15
7.1 Stock market capitalization as percent of GDP - Hong Kong SAR,
China
(2000 – 2018)

Source: World Bank

7.2 Stock market capitalization as percent of GDP, 2018 - Country rankings

Source: World Bank

Hong Kong is the top country by market capitalization (% of GDP) in the world. The

average value for Hong Kong during the period of last 10 years is 1105.59%. The latest value

16
from 2019 is 1326.902% whereas the world average in 2019 based on 63 countries is 144.9%.

Even the U.S. market cap-to-GDP for 2019 is 156%.

Typically, a market cap-to-GDP greater than 100% is said to show that the market is

overvalued, while a value of around 50% is said to depict undervaluation. The market

capitalization of Hong Kong is a strikingly high percentage of its GDP; however, this does

not mean Hong Kong’s stock market is alarmingly overvalued.

Hong Kong's stock market benefits from an abnormally high percentage of overseas

firms, particularly Chinese firms, which choose it as their hub for listing. Since foreign

companies that choose to list their shares in Hong Kong generate most, if not all, of their

profits in other countries (i.e., mainland China), they don't contribute directly to the overall

GDP of Hong Kong. This helps to understand why the cap-to-GDP ratio for Hong Kong's

capital market is so inflated. Not just Chinese companies, there are even dual-listings in Hong

Kong for some of world’s largest multinationals, including Japan’s fast-fashion behemoth

Fast Retailing and Italian luxury designer Prada. Such major corporations are also

contributing to Hong Kong's overall market capitalization without having to add to its GDP.

Hong Kong remains reasonably valued.

17
 8. Comparison between Hong Kong Stock Exchange and
Shanghai Stock Exchange
For comparison, we have selected Shanghai Stock Exchange as it is China’s largest

stock exchange with the highest market capitalization. All the data for both the stock

exchanges has been provided in USD for ease of understanding, as both the exchanges use

different currencies for trading.

8.1 Asset Traded

Number of Listed Companies

(as of April 2020)

Shanghai Stock Exchange (SSE) Hong Kong Stock Exchange (HKEx)

1619 2449

A substantial difference can be observed in the number of listed companies in the

Hong Kong and Shanghai stock exchanges. For most Chinese companies seeking to raise

capital, the Hong Kong Stock Exchange has always been a preferred destination, as Shanghai

exchange is more restrictive and has higher financial requirements. Hong Kong attracts more

foreign investors too.

Investors can enjoy multiple advantages in Hong Kong stock exchange that are

missing in Shanghai. Such as, a registration-based IPO system allows easy and quick listing

compared to Shanghai. Hong Kong has greater international exposure enabling it to serve as a

springboard for global expansion. Besides, capital controls are much relaxed in Hong Kong

and the minimum standards for listing are also lower. Moreover, the sound financial

infrastructure of HKEx helps curb operational costs and an effective regulatory framework

allows transparency. Hence, majority of foreign and local companies prefer listing in HKEx.

18
 8.2 Trade volume (USD Billion)
(2015 – 2019)

Date SSE/USD Hkex/USD

2015 $ 42.00 $ 60.41
2016 $ 55.93 $ 53.36
2017 $ 41.48 $ 58.70
2018 $ 58.25 $ 63.97
2019 $ 36.25 $ 53.34

Source: (Hong Kong Exchanges and Clearing Limited, n.d.) (SSE Composite Index, 2020)

Trading Volume (Billion USD)

$70.00 $63.97
$60.41 $58.70
$60.00 $53.36 $53.34
$50.00 $58.25
$55.93
$40.00
$30.00 $42.00 $41.48
$36.25
$20.00
$10.00
$-
2014 2015 2016 2017 2018 2019 2020

Hkex/USD SSE/USD

Fig: Graphical representation of the trading volumes of SSE and HKEx (2015 - 2019)

Although Shanghai Stock Exchange is China’s largest, HKEx surpasses SSE in terms

of the volume of traded assets by a wide margin. This contrast in performance is majorly

owing to the volatility of the Shanghai Composite Index (SHCOMP) with respect to the Hang

Seng Index (HSI). China's stock market is relatively new and mainly composed of

individuals. The lack of experience in dealing with a stock market makes China’s exchange

vulnerable to crashes. The Hong Kong stock exchange, however, have methods of slowing

the market to allow for trading during falling prices.

19
 Another factor which contributes to this volatility in the index and Chinese stocks in

general is the lack of stock market players. Hong Kong’s relaxed economy and a more

matured stock exchange accommodates a large number of powerful foreign companies. These

big players have vastly different risk tolerances than individual retail investors that make up

80% of SSE. A lack of big international companies and hedge funds that play a significant

role in preserving market liquidity and transferring risk to experienced institutions created a

low average trade volume although market capitalization remained high.

8.3 Market Capitalization (USD Trillion)

Date SSE HKEX

2015 $ 7.51 $ 3.08
2016 $ 7.18 $ 3.58
2017 $ 8.02 $ 4.39
2018 $ 6.14 $ 3.86
2019 $ 8.47 $ 4.92

Sources: (Total market capitalization of China's stock market 2012-2019, 2020) (HKEX, 2015)
(HKEX, 2016) (HKEX, 2017) (HKEX, 2018) (HKEX, 2019)

Market Capitalization ($Trillion)

$10.00 $8.02 $8.47
$7.51 $7.18
$8.00 $6.14
$6.00
$4.00
$4.39 $4.92
$2.00 $3.58 $3.86
$3.08
$-
2014 2015 2016 2017 2018 2019 2020

HKEX (USD Tril) SSE (USD Tril)

Fig: Graphical comparison of market capitalization of HKEx and SSE (2015 - 2019)

Both the number of listed companies and volumes of assets traded are notably higher

in Hong Kong stock exchange, yet Shanghai exchange has significantly more market
20
capitalization compared to HKEx. This apparent discrepancy is due to stock prices being

much higher in SSE than in HKEx. In fact, shares of the same company trades at a

considerably increased price in SSE than their shares in HKEx. This price gap arises because

of a phenomenon called A-to-H Premium surge, which is unique to China and Hong Kong.

A-shares, listed in Shanghai stock exchange, trades in yuan renminbi (CNY) and it

represents only Chinese companies. H-shares, listed in Hong Kong stock exchange, use the

Hong Kong dollar (HKD) and are freely tradable by anyone. The A-H premium measures the

premium of A-shares over H-shares. In November 2014, the two exchanges were linked

through the Shanghai-Hong Kong Connect program enabling foreign investors who

previously had access to H-shares only, to buy A-shares of Chinese companies. Using this

opportunity a large number of companies went for dual listing of stocks. Since Hong Kong’s

market place works much differently than mainland China, investors value companies

differently and have contrasting viewpoint about the future. Such investor sentiments and

trading behavior causes a discrepancy in the stock prices and SSE stocks are priced higher.

The market capitalization of SSE, hence, is also much higher than HKEx.

21
 9. The importance of Hong Kong stock market in global
context

Ever since becoming a member of Special Administrative Region of the People’s

Republic of China in 1997, Hong Kong has continued to enjoy a high degree of autonomy

and has maintained its own currency, a vibrant stock exchange and remained as an important

and leading center of trade and finance. Over the years the top companies in Hong Kong has

made a significant impact on the global economy. Hong Kong has a free market economy and

is incredibly dependent on international trade and finance. Hong Kong has no tariffs or tax on

imported goods and exercise tax on only four commodities whether or not it is imported or

produced locally - hard alcohol, oil, tobacco and methyl alcohol. Excess liquidity, low

interest rate and narrow housing supply have caused Hong Kong property prices to rise

significantly.

Hong Kong’s open economy has left it exposed to global economic situation. Its

consistent reliance on foreign trade and investment makes it vulnerable to a slowdown in the

global economy.

Mainland China has been Hong Kong's largest trading partner for a very long time,

accumulating for about half of Hong Kong's total trade by value. Hong Kong's natural

resources are limited, and food and raw materials must be imported. As a result of China's

easing of travel restrictions, the number of mainland tourists to the territory surged from 4.5

million in 2001 to 47.3 million in 2014, outnumbering visitors from all other countries

combined. After reaching its peak in 2014, overall tourist arrivals dropped 2.5% in 2015 and

4.5% in 2016. The tourism sector ricocheted in 2017, with visitor arrivals rising 3.2% to

58.47 million. Travelers from Mainland China totaled 44.45 million, accumulating for 76%

of the total.

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 Hong Kong SAR was a globalized economy long before the advent of global value

chains in the 1990s. The globalization of Hong Kong is driven largely by unique economic

and political conditions. Given its small domestic market and lack of natural resources, it was

natural for Hong Kong to evolve into a flexible, adaptive and outward-looking economy in

order to maintain its competitiveness. The tendency towards an open economy was reinforced

by developments in Mainland China. In particular, before Mainland China opened up in the

late 1970s, Hong Kong’s political isolation from its motherland and a series of events in

Mainland China, helped to develop Hong Kong as a unique link between Mainland China and

the rest of the world. After Mainland China opened up, Hong Kong’s role was further

consolidated on the back of Mainland China’s economic reforms and financial liberalization.

Leveraging on the key intermediary role between Mainland China and the rest of the world,

Hong Kong has become a highly globalized economy

As an economy becomes more deeply integrated into the global economy, a rapid

transformation may ensue as the economy’s comparative advantages evolve over time due to

changes in the external environment

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 10. Level of information provided on the market
In our opinion, the level of information provided on the market was adequate for

conducting a study. A bulk of our required data was collected from the official website of

Hong Kong Stock Exchange and Clearing to ensure authenticity of information. The

historical data of the exchanges have consolidated into annual “Fact books” allowing easy

access to necessary data for conducting trend-analysis and research. Additionally, the

government of Hong Kong issues an annual publication giving an account of the economic

performance of Hong Kong in various sectors. The information gathered from the

publications provided important insight in conducting this study. The remaining data were

collected from other external sources such as World Bank, Bloomberg, Yahoo Finance, and

similar reliable websites. Overall, we were able to gather all the information required for this

report.

Consolidated information on trade volume, market capitalization, GDP and economic

growth, performance of stock market etc. are readily available in an organized manner. In

fact, the available information will also provide sufficient insight to investors about the

market situation before making any investment decisions. Hence, we can say that the

information available on the Hong Kong stock exchange market is sufficient for study and

analysis.

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 11. Efficiency and Liquidity of Hong Kong Stock Exchange

An efficient market is hypothesized to be one where all stocks trade at fair value,

entirely eliminating the possibility of beating the market. Analysis of the stock market prices

in developed markets like that of Hong Kong provides evidence for weak form of efficiency

(Cheung & Coutts, 2010). It means all the previous information available to public is

reflected in the price of a security. Although the large number and heterogeneity in market

participants make things difficult, Hong Kong shows potential in improving internal market

efficiency.

The Hong Kong stock market provides deep and highly liquid access to capital for

both Chinese and foreign corporations and serves as a hedging tool for any rising market. It is

very sensitive to any external factors. To further strengthen trading liquidity for market

participants, the exchange raised the minimum market capitalization for a listing to HK$500

million and the minimum value of public float to HK$125 million (Investopedia, 2018).

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 12. Conclusion

After elaborate research on the Stock Market of Hong Kong we can conclude that, as

of 2019, the market indeed has a solid position both in Asian and global context. 2449

companies are listed in the market that consists of both Chinese and foreign companies.

Sensitive to fluctuations in US interest rates, the trade volume frequently oscillated.

However, growth rate remained steady until 2019 when market faced a downturn in trade

volumes due to political unrest. The growth on market capitalization was also steady, except

a hike was noted in 2017 following global economic upturn. World’s largest video-gaming

company, Tencent, is the biggest player in the HKEx market alongside the major banks of

China. The presence of such big contenders doesn’t allow the marketplace to be friendly

towards small and individual investors, but creation of a separate exchange has been

proposed to accommodate them. Although the Shanghai stock exchange is mainland China’s

largest market, HKEx surpasses SSE in terms of listing preference and trade volume.

However, HKEx underperforms in terms of market capitalization majorly owing to a unique

phenomenon called A-to-H premium surge that causes a price gap for the same stocks listed

in both exchanges. Although market cap-to-GDP ratio of Hong Kong is strikingly high and

comes out on top in the world ranking, the market in fact remains reasonably valued. Hong

Kong’s free economy, low taxes, nearly free port trade and established financial market

attracts a large number of foreign investors who views Hong Kong as a springboard for

expansion to mainland China and across the globe. Even though mainland China has two

major stock markets, many local and foreign investors prefer a detour through Hong Kong

due to their favorable regulatory framework and available professional services. Therefore,

the presence of Shanghai and Shenzhen stock markets in the mainland China cannot dampen

the significance of Hong Kong Stock Exchange as of now.

26
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