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Well good evening everyone. All of you who you have a company even a quarter as good as Mindray, please come see me afterwards and we can do business because we’re definitely looking for the next twenty Mindrays.
I’m honored to be here at CEIBS and I’m honored to be with you tonight. I always look forward to coming back to China because one of the things that I get to do is meet China’s next generation of leaders. And this is a very, very important time for your economy and for your country. Two years ago I spoke at Fudan, last year I spoke at Tsinghua, and now CEIBS. So now I can truly say that I’ve had the honor to say I’ve been speaking to China’s best and brightest.
As you know, I’m a person who works at the forefront of financial markets and I believe this is a very exciting time for global capital markets, which represent such an important force for progress across all of our societies. So I come here today to speak about China and China’s future from that perspective. And I want to do so in three ways: I’ll begin by outlining the major trends of globalization and consolidation that are changing our industry, the exchange industry; second I’ll discuss how the New York Stock Exchange is seeking to lead that transformation and as we do to strengthen our relationship with China’s issuers, markets and China as a whole; and then I’ll turn to China and China’s position in the world…. And I want to focus on China’s opportunities to build capital markets that can grow in tandem with the boundless potential of China’s economy.
Successful capital markets that can attract savings and direct them into profitable investments will be the wellspring for China’s future growth. And for those of you who are students of finance, or for those of you who are being groomed for leadership roles, this is a paramount financial challenge for the future. Towards that end, I would like to discuss what I consider the four key steps for building capital markets – those are transparency, education, incentives and regulation. I’ll also leave plenty of time for questions and discussion.
But let me begin with the transformation of global financial markets. The process began gradually but is now accelerating very rapidly. Investment banks were really the first out of the gate to consolidate and globalize financial services. Exchanges lag behind. Why? Exchanges are seen differently. Exchanges are seen as important national assets. Just as each country needs an airline and postage system, they also need an exchange. Nevertheless, powerful market forces inevitably work their will. Starting in the 1990’s tremors began changing the landscape of global markets. First, demutualization, the decision by individual exchanges to become public, for profit marketplaces. Then, we saw the bursting of the dotcom bubble and disinflation which marked the end to double digit returns. Suddenly, the bar was raised for everyone. Suddenly, every exchange saw the need to re-examine its business model.
Exchanges face new imperatives – to find greater efficiencies, build faster and cheaper trading systems, diversify products to create new revenue streams. At the same time, as more countries embrace globalization and embrace open competitive markets, equity cultures have proliferated. So the number of people globally owning stock has soared from 100 million following World War II to over a billion today. Today, more investors can send more capital to where it is wanted most and treated best.
All of this has created two new realities. First, global markets are more liquid with smaller markets growing fastest. For example, while overall market capitalization in the United States grew by about 4% from 2001-6, markets abroad grew faster. London grew by nearly 10%, Euronext and Borsa Italiana grew by over 10%, Tokyo by 14%, Australia by over 19%, Hong Kong by 20%, San Paolo by 25%, and Korea and Johannesburg by over 30%. Five years ago, it would have been impossible for China Construction Bank to raise $9 billion in Hong Kong and now they can.
The second new reality is consolidation. Markets are aligning themselves within regions, within asset classes and globally. First, in our case, the NYSE and Archipelago and we are well on track to merge with Euronext. NASDAQ bought Instinet and maybe they’ll buy London. You’ve seen in Chicago the CBOT and the CME hoping to combine. And investment banks have invested in smaller exchanges in the United States, Philadelphia and Boston in particular, and they’re potentially creating new exchanges that have trading platforms in Europe. So exchanges are playing catch-up but the progress is proceeding very quickly.
Demutualization, diversification, consolidation are the drivers. We believe the transition to a small number of large, global players that are multi-asset class and geographically diversified will provide products and make better markets for investors, issuers and eventually the world economy. We want to be at the forefront to help lead this transition.
To do so, we’ve embarked upon a journey of transformation. So let me first turn to the New York Stock Exchange. The New York Stock Exchange is a $23 trillion market, nearly four times larger than the next biggest equities market. We’re a market leader across all of our sectors. We are the global listings market of choice. We set industry standards for quality. We offer the best bid and offer 90% of the time. We offer the deepest liquidity, the lowest execution costs, the tightest bid / ask spreads, and the lowest volatility. However, customers made clear to me early on in my career at the exchange that we needed to become a faster market. Customers wanted the capability to trade electronically, instantaneously and anonymously. So we’re building a structure we call the NYSE Hybrid market, which provides more choices for investors trading in our 2,700 listed companies. They can trade, if they want to, electronically, instantaneously and anonymously, or they can continue to access the trading floor and get the opportunity to benefit from the liquidity and opportunity for price discovery and price improvement. In addition, we recognize the need to overhaul our strategy. For over 200 years, the New York Stock Exchange essentially remained a one product market.
One product markets are increasingly unable to compete in today’s multi-asset class world. When we surveyed the global landscape, we saw two very formidable players in Europe, Euronext and Deutsche Borse. Both are public, for-profit companies, both had large market caps, offered multiple products and geographic diversification, and in the case of Deutsche Borse vertically integrated. We saw markets in Europe unlike the US market linking cash, options and futures. We heard the message of the markets and saw the challenge and we then began to move with speed and purpose. We began, first, with the merger with Archipelago through which we became a public for-profit company. We gained by being a public company an acquisition currency, we diversified our product mix into over-the- counter stocks, options, exchange traded funds, and we’re launching a new listings platform to pursue smaller, faster growing companies who don’t necessarily qualify to list on the New York Stock Exchange.
And through the proposed transaction with Euronext, we’re diversifying globally to build the first truly global marketplace. We’re uniting the largest exchanges in the world’s two leading economies, the U.S. and the EU, the two major currencies, the dollar and the Euro, and we’ll span across multiple time zones and create the world’s largest pool of liquidity. We will list 80 of the world’s largest companies; we’ll have a combined market value traded on our exchanges of over $28 trillion. And beyond Europe we see the next linkages coming from Asia with Japan, China and India.
It was very interesting when our transaction was first announced with Euronext, Taizo Nishimuro, the CEO of the Tokyo Stock Exchange commented to the press that NYSE / Euronext makes a lot of sense as the logical partner down the road for the Tokyo Stock Exchange. For the past decade, we’ve had a ringside view of the globalization of the financial markets and now with the new structure and new strategy we want to drive the momentum for a great listings business. A decade ago we had 150 companies listed from outside of the United States. Today we’ve grown to 448 companies from 47 countries which represent over $9 trillion of market value. Everything we see points to the increasing globalization of our business. Every day on the New York Stock Exchange we trade some $8 billion of non-US stocks. Non-US volume in 2006 is almost double of what we traded in 2005. Clearly investor demand for non-US securities is very strong.
US investors now hold about 20% of their portfolios in non-US stocks. That represents over $3 trillion in assets, a record level. Recent history also shows that companies that cross list, and by that I mean they list in their home market and in the US, carry valuation premiums up to 30% higher than companies that are not listed in the US. And nowhere are there better examples than our listings from China. The fastest area of growth of new investments is in the emerging markets. We typically refer to them as BRICs -- Brazil, Russia, India and China. And China is rapidly moving to the center stage to become one of the major players in the world. As China advances from an agriculturally-based economy to high powered growth through manufacturing and services, you can be proud of China’s success as one of the world’s strongest emerging economies, with double-digit growth rates and enormous potential for economic leadership.
We prize our relationship with China, China’s exchanges and its listed companies. The first overseas IPO (initial public offering) by a Chinese company was Shanghai Petrochemical, which first listed on the NYSE in 1993. The NYSE has also supported the Shanghai and Shenzhen Exchanges’ quest to join the World Federation of Exchanges. Today, we’re honored to have 31 leading companies from Greater China listed on the NYSE. Their combined market value is nearly US$730 billion. And we’ve recently seen a very steady stream of successful Chinese IPOs. We welcomed leading Chinese entrepreneurial companies, like SunTech, New Oriental and of course Mindray Medical, and we believe that Chinese companies have strongly benefited from their relationship with us.
Our commitment is unrivalled service at the center of global capitalism. We’re committed to helping our listed companies raise their global profile, strengthen individual investor and institutional followings, and we’re seeing it happen. From their launch dates on the New York Stock Exchange to the end of the third quarter, Mindray Medical shares have increased by 30%, New Oriental’s are up nearly 40%, and those two companies are near the top 10 performing of all initial public offerings on the US financial markets this year. To sum up, Chinese companies are experiencing excellent growth and valuations and excellent investor demand. I will turn now to China and building China’s capital markets. Building vibrant, prosperous 21st century economies requires successful vibrant capital markets. And capitalism, of course, begins with capital. Capital raising functions begin in the capital markets and it begins when issuers and investors unite to provide the financial fuel for risk-taking, innovation, job creation, profits and economic growth. Capital markets that work well price risk and reward, one investment opportunity versus another. Capital markets that perform efficiently do what no government can do by ensuring the best allocation of resources. For over 200 years, the New York Stock Exchange has fulfilled this role, encouraging entrepreneurship, mobilizing capital for business, enabling individuals to accumulate wealth by investing in securities. Our capital market began in 1792.
This is one reason why the market value to GDP ratio in the United States is 137.6%. China’s capital markets began in 1992, and so understandably, the market value to GDP ratio is significantly lower, about 33%. There is no reason why China can’t speed and strengthen the development, the evolution of and confidence in its equity markets. During my visits in just the past three years, I’ve witnessed encouraging progress. I see China embracing the WTO, reducing the dominance of state owned enterprises, and opening the banking sector to foreign competition. And today, I want to suggest some specific steps toward the goal of robust, liquid, competitive and efficient capital markets. I do not presume to say what is best for China.
However, through our dealings in many markets we’ve seen certain steps which work globally. So let me briefly mention four. First, transparency for issuers, investors and intermediaries. Second, the importance of education and training to build an equity culture. Third, incentives for capital formation to encourage risk-taking, investment and ownership in competitive markets. And fourth, creating a regulatory system with clear and certain rules and an enforcement mechanism that is consistent and fair. The sum of these actions is equivalent to putting up a welcome sign for capital. Let me begin with transparency. It is in China’s interests to become a haven and destination for capital, and then to mobilize capital both from within and outside your country to put China on the cutting edge of innovation.
The first step is to ensure transparency for issuers, investors and intermediaries to China’s market place. The greater the transparency, the easier it will be to attract high quality companies and importantly, small and medium-sized enterprises. And as we know, in the past China has been dominated by state-owned enterprises. However, small and medium-sized companies are the most dynamic innovators, job creators, new product and market makers. That’s on the supply side. The demand side is equally important, encouraging investment in China’s markets. Experience has taught us that standards of transparency and governance are increasingly important investment criteria. Strong standards of transparency strengthen investor confidence, which promotes improved equity performance, higher valuation and stronger brands.
Here we are talking about reassuring investors with the right answers to their questions: for example, that company boards are vigilant, that audit committees are doing their jobs, and that financial information is being fully and accurately disclosed. Encouraging investment also means attracting a growing cross-section of investors; attracting millions of new investors, from abroad and within - new retail investors, institutional investors, insurance companies and pension funds that learn about markets and learn how to invest in markets. So here’s where the second and third steps come to play - education and training to build an equity culture and providing incentives to own a stake in China’s future. Educated investors become smarter investors; smart investors take risks without being reckless. As China’s equity culture continues to grow, you will need intermediaries to respond to new needs, for example, asset managers to represent the interest of savers, investors, pensioners and insurers.
I’m encouraged by what I see - by your MBA program here at CEIBS, which has been ranked #1 among Asian business schools – congratulations; by China’s commitment to expand education, and by training Chinese to become investment and asset managers, who can open up offices, examine balance sheets, and compare the performance of competing companies. This is the challenge to educate and train a new generation of entrepreneurs, engineers and accountants. I mentioned the importance of incentives to spur ownership. I’m pleased to see a range of new decisions, actions and commitments. The Bank of China and China Construction Bank announced pending employee stock ownership plans for this year. In May, the governor of the People’s Bank of China encouraged state-owned financial institutions, for the first time, to adopt employee stock ownership plans.
So we see a transformation occurring. In fact, China may outdo America. I’m told there is a new hit TV show called ‘Win’ in China, where young men and business women compete to win 10 million RMB in venture capital financing for their business plans. I hope you all watch it. Fourth, and finally, let me stress the importance of good regulation. As China builds its capital markets, people who invest will want assurances that markets are honest and fair, and that there are safeguards for individual investors. They will want to be assured that Chinese markets compete openly, that they deliver high quality, and that individual orders receive the best possible execution. In addition, people will want to be confident that their earnings are safe, that they will not be subject to confiscation.
They will want to know that property and shareholder rights will be protected by the rule of law and that if there are problems, investors will have recourse for their remedies. In the US, these issues are entrusted to the regulators who oversee our financial markets; and we’ve learned, and occasionally we need to re-learn, the importance of creating the right balance of regulation and governance versus risk-taking and investment. Regulation is best when clear and certain, and when there is an enforcement mechanism to ensure punishment is swift and sure for wrongdoers. Good regulation will help maintain investor confidence in China’s corporations and markets.
What must be avoided are overly costly, or intrusive and burdensome rules that discourage investment, discourage listings, and thus, hamper growth. We have found that regulation that is independent and close to the markets works best in this new era of high speed, multi-product trading. Regulators who are close to markets and work in real-time can stay ahead of the curve. And finally, a well-regulated market is an indispensable ingredient for quality which enhances the overall value that comes from the marketplace. In conclusion, capital markets that can develop fully and function freely are the best allocaters of risk and reward. And to become a global powerhouse, China must ensure that its capital markets functions are not exported.
But if a journey of a thousand miles begins with a single step, China has already taken many steps. And I would like to see us go forward as partners to make this journey together. And I can’t imagine a more capable and committed group to help lead that journey than the men and women in this room. So, thank you for inviting me. I’d now be happy to take some questions.
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