LCQ4: Reforming Growth Enterprise Market
6.7.2022

Following is a question by the Hon Elizabeth Quat and a reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui, in the Legislative Council today (July 6): Question: The Growth Enterprise Market (GEM) was launched in 1999 with the aim of enabling small and medium enterprises and innovative enterprises which do not meet the Main Board's listing requirements to be listed for raising funds. Some members of the financial sector have relayed that following the waned "Internet bubble" and the cancellation of the streamlined application procedure for transfer from GEM to the Main Board made by the authorities in 2018, the number of new listings and trading volume of GEM have been dwindling incessantly. In this connection, will the Government inform this Council: (1) given that the Hong Kong Exchanges and Clearing Limited commenced a review last year on the positioning and functions of GEM, whether preliminary outcome of the review is available, and of the expected date for consulting the market; (2) whether the Government will take the lead in making use of the Future Fund or the Hong Kong Growth Portfolio to suitably invest in GEM, or using them as seed money to raise funds by pairing up with the funds from technology venture capital companies for investing in GEM, thereby increasing the capital inflow of GEM; if so, of the details; if not, the reasons for that; and (3) whether it will, by drawing reference from the practice of the Shenzhen Stock Exchange ChiNext in expressly supporting the development of innovative and growth enterprises, reform GEM to attract innovative enterprises of different trades which meet the "environmental, social and governance" criteria to list on GEM, or reform GEM by turning it into an "innovation and technology board"; if so, of the details; if not, the reasons for that? Reply: Acting President, Thanks for the question from the Hon Elizabeth Quat. My consolidated reply is as follows: Hong Kong is a major global listing platform for companies from different jurisdictions. The Government of the Hong Kong Special Administrative Region, the Hong Kong Exchanges and Clearing Limited (HKEX) and the Securities and Futures Commission (SFC) have all along been striving to strengthen the breadth and depth of the Hong Kong fundraising platform. We have continuously refined our listing regime having regard to the latest developments, with a view to meeting the fundraising needs of issuers while safeguarding the interest of the investing public. In this regard, since its establishment in 1999, the listing rules of the Growth Enterprise Market (which is called GEM at present) have been revised a number of times in view of changing market conditions. In 2017, in response to market views that the requirements of GEM back then had been abused by market participants and problems such as high shareholding concentration, illiquidity and high share price volatility were common, the HKEX repositioned GEM in 2018 as a stand-alone board after consulting the market. The reform aimed to allow applicants who intend to list in Hong Kong but could not meet the Main Board listing requirements to choose GEM as a more targeted fundraising platform. In order to improve market quality, the HKEX also cancelled the streamlined process for transfer to the Main Board under GEM; raised the minimum market capitalisation requirement for GEM applicants at the time of listing; and implemented the sponsor regime. Since the reform in 2018, the HKEX has been cognisant of market conditions as well as the issues conveyed by Legislative Council (LegCo) members and market participants, such as the drop in number of new listings and turnover of GEM, the lack of interest by issuers and investors, etc. There were also views that further study should be conducted on the positioning and functions of GEM as a specific board for listing of small and medium-sized enterprises (SMEs) and innovative companies. To this end, the HKEX commenced a review on the functions and positioning of GEM last year, and established a dedicated panel under the Listing Committee to handle the work concerned. The review will be conducted with a view to further strengthening the competitiveness of Hong Kong as a global premier listing hub and enhancing the overall quality of the Hong Kong capital market. Alongside facilitating different types of enterprises to list in Hong Kong, the HKEX will take into consideration market attractiveness and liquidity, and protect the interests of the investing public. The work concerned will involve many aspects, such as understanding the concerns of issuers and investors; exploring ways to enhance the liquidity of existing stocks; identifying the source of potential issuers which are suitable to raise funds through stock market but could not meet the listing requirements of the Main Board or the existing GEM; assessing the attractiveness and market liquidity of potential issuers, in other words, whether they could attract investors to hold and trade relevant securities continuously; considering relevant risk management measures, etc. The HKEX will also proactively make reference to the experiences of similar markets in other places, including the development of fundraising platforms for SMEs and innovative enterprises in the Mainland in recent years, i.e. the Science and Technology Innovation Board (STAR Market) of the Shanghai Stock Exchange, ChiNext of the Shenzhen Stock Exchange and the Beijing Stock Exchange. The views conveyed by LegCo members to us on different occasions, such as re-introducing the streamlined transfer mechanism, attracting the listing of innovative companies, establishing mutual access with Mainland markets, introducing additional avenues for secondary listing, enhancing the environmental, social and governance (ESG) disclosure standards of listed companies, etc, will be carefully considered as a whole. Since the review involves various complicated issues, the HKEX has yet to devise a concrete timetable on the review. The HKEX will propose specific measures and further consult the market publicly upon understanding the market demands thoroughly and considering relevant risks. As regards the Hong Kong Growth Portfolio (HKGP) under the Future Fund mentioned in the question, its vision is to make strategic investments in projects with a Hong Kong nexus, with a view to raising Hong Kong's productivity and competitiveness in the long run, while seeking reasonable risk-adjusted returns. To avoid potential, actual or perceived conflict of interest, the Government will not be involved directly in the individual investment decisions or specific investment projects. It is the general partners appointed by the Investment Committee, who are private equity firms with professional capabilities, to make investments. At the same time, to nurture enterprises that are relatively more mature and have good potential for contribution to our economy, the Financial Secretary announced in the 2022-23 Budget Speech to further increase the funding allocated to the HKGP under the Future Fund by $10 billion, of which $5 billion will be used to set up the Strategic Tech Fund. The Hong Kong Science and Technology Parks Corporation and the Cyberport would be invited to identify technology enterprises which are of strategic value to Hong Kong, as well as investment opportunities conducive to enriching the innovation and technology ecosystem. Relevant preparatory work is underway. In addition, to facilitate the fundraising of technology companies, the Financial Secretary announced in the 2022-23 Budget that, considering that some large scale advanced technology enterprises require substantial capital for their research and development work but fail to meet the profit and trading record requirements, the SFC and the HKEX will review the Main Board Listing Rules and, having due regard to the risks involved, examine the revision of the listing requirements to meet the fundraising needs of such enterprises. The HKEX is approaching different stakeholders for views, with a view to putting forward concrete recommendations as soon as practicable and consulting the market publicly. Thank you, Acting President.