The Board of Directors of Hong Kong Exchanges and Clearing Limited (HKEx) has sent a letter to the Financial Secretary expressing concern that implementation of the Expert Group's recommendations without more thorough consideration would risk doing serious damage to the competitiveness of the Hong Kong equity market. A copy of the letter (without enclosures) is being distributed with this news release. The contents of the letter will also be posted on the HKEx website, www.hkex.com.hk.

The 13-page letter includes some of HKEx's concerns about the Expert Group's report along with its comments on several major issues raised by the report.

The report appears largely to reflect the views of commentators rather a thorough independent analysis of the underlying facts and merits of the various policy options. It appears that the Expert Group recommended the adoption of the United Kingdom's regulatory model without seriously considering other alternatives which may be more suitable for Hong Kong. HKEx does not think the UK model is appropriate because the London and Hong Kong markets are very different. HKEx submitted a proposal on a North American-style model, but does not think the proposal was given a fair hearing.

The Expert Group's recommendations also raise the following concerns.

• Structural Bias - HKEx thinks combining the functions of policy maker, enforcement agency and adjudicative body in one organisation is structurally biased and will result in scepticism about the fairness of the system.

• Proper Process - HKEx is alarmed by the suggestion that the Government might endorse such radical change in a regulatory system without more thorough analysis of the issues or any proper public consultation.

• Market Quality - The report fails to directly address the issue of market quality beyond a recommendation that the minimum distribution requirement in an initial public offering should be increased from 100 to 300 shareholders, which HKEx proposed before the Expert Group was appointed. Also, HKEx seriously questions the Expert Group's implied assumption that transferring the listing function to the Securities and Futures Commission (SFC) would lead to more effective vetting of listing applicants and/or greater ability to remove under-performing companies from the market.

• Checks and Balances - The current three-tier regulatory system for listing matters provides an extra layer of checks and balances and an extra layer of regulatory supervision. By suggesting the Government should distance itself more from regulation and that the SFC should have the power to make rules which carry statutory backing without the need for legislative approval, the report comes very close to recommending what amounts to a one-tier system.

• Role of Market Practitioners - The role of the present listing committees would be reduced to hearing appeals and serving as a consultative body on policy issues. HKEx doubts the wisdom of removing the input of individuals with commercial experience and business expertise from the decision-making process on listing matters.

In light of its current concerns and others which will undoubtedly arise when the report is studied in more detail, HKEx urges the Government to carefully consider the implications of implementing the Expert Group's recommendations, particularly without public consultation. HKEx also hopes the Government will examine other alternatives before radical institutional change is imposed on the market with consequences which have not yet been fully assessed and will surely be very far-reaching.