Transcript of the Interview with Francis Leung (梁伯韬)

China Boom Project, Asia Society 2009 Leung, Francis (梁伯韬)

Senior Advisor, CVC Capital Partners

Francis Industry: Leung Business has worked as an investment banker in Hong Kong for nearly thirty years. He led the effort to get some of the first Chinese companies listed on the Hong Kong stock market, and helped manage the first initial public offering (IPO) of a Chinese company on the Hong Kong stock market. He has been dubbed 'father of red chips' for leading the effort to get the first Chinese companies listed on the Hong Kong stock market, and managing the first initial public offering (IPO) of a Chinese company on the Hong Kong stock market. He has worked closely with Hong Kong tycoon Li Ka-‐shing, was Asia Chairman for Citigroup Global Markets and is a Senior Adviser to CVC Capital Partners. Transcript -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐ 梁伯韬

Interviewee: Francis Leung ( ) Interviewer: John Delury Videographer: Josh Chin Date: March 19, 2009

Place: Hong Kong

QUESTION What we’re doing here is creating an archive so 100 years from now historians can listen to how people thought about China in the last 30 years. One of the first things historians are going to want to know is about you – you’re a very well known figure in Hong Kong and the financial world globally but you may have to remind them 100 years from now what you’ve been doing. So if you could give us your life story focusing on how it’s related to the China boom…

0:1:27 FL Right, right. Well, I have been involved in investment banking in my past career, until recently. I left investment banking before the financial crisis…so I left investment banking two and a half years ago. But before that I was involved in corporate finance mainly to help companies to raise capital from the stock market and I also advised on mergers and acquisitions as well. Um, so in the past that was my job, and nothing else. However, I left investment banking two and a half years ago and now I’m on the byside making investments on my own, and I’m also advising private equity funds, okay. For example, now I’m sitting in the office of CVC. CVC is a very large biofund [Dan: I think that’s what he said. It wasn’t totally ] clear. based in Europe. It is also one of the largest pools of funds in Asia as well.

0:2:49 So, um, my involvement with China was probably about twenty years ago, that’s the beginning, okay. Originally when I joined investment banking, it was mainly a local business. I was serving local corporations, local clients. But when China started to open up, okay, its doors, it started the economic reforms, I follow my clients and go into China.

0:3:33 That was in the late In 80s, okay. the late 80s, many Hong Kong companies started to move into China to take advantage of the cheap labor and the abundance of land supply there. 0:3:49 Umm..that’s my first experience in China. Actually, that was a transformation of Hong Kong manufacturing sector. Most of the manufacturers since then have moved to China now. Hong Kong manufacturers now employs millions of people the Pearl River Delta and further north as well. So, that was my beginning involvement in China activities. 0:4:33 But at that time, my clients are still mainly Hong Kong companies. These Hong Kong companies have moved their base, their manufacturing base into China.

0:4:46 And then at that time we started sort of the China concept. That was the earliest China concept. I mean, companies because of the move into China, they increase their profit margins and um, they have become more competitive. So that is an attractive story to investors. That was the first, the earliest China concept. By moving operations, um, into China.

0:5:29. But then, uh, in the early 90s, okay, we have seen the beginning of the economic reforms in China, and that actually has attract more investors interest to China. Um, and also in the early 90s, okay, China started its local stock exchanges. One is in Shenzhen, the other one is based in Shanghai. So, investors started to invest in Chinese companies. And I was the, well, um, one of the first ones who were instrumentals in bringing Chinese companies to international investors, okay. I remember that in the early days, in the late 80s, in the early 90s, when the um, China stock market was not opened to international investors, we had to bring Chinese companies to the Hong Kong market, okay. 2

0:6:55 Originally, um, originally, um, we focused on those Chinese companies which have operations in Hong ong, K which have businesses in Hong Kong. Like Citic, the Citic group, okay, um, like China Resources, um, and uh, Guangdong Investment and so on. These are Chinese companies but they have operations in Hong Kong. So that was my first move, because they have already established in Hong Kong, and their entities are Hong Kong incorporated entities. So it was easier, technically, to help these companies to go to the public market. That was my first move. And these companies are called red chips now. These are companies incorporated outside of China but owned, really, by the Chinese government or related to the Chinese government. So that was the first kind of listing Chinese companies in Hong Kong.

0:8:21 QUESTION Let me ask a quick question about that, and then let you continue.

FL Sure. Yeah.

0:8:23 QUESTION Back then, how risky was this, the perception of what you and others were doing? Were there people who thought this was crazy or was it something where pretty quickly you were easily able to attract a lot of investors and capital they were glad someone was doing it?

0:8:42 FL Yeah, yeah, let me back track a little bit. In fact, before I brought the first Chinese companies to the Hong Kong stock market, you know, I had been doing a lot of educational work, okay. I had to educate the Chinese companies, okay, first of all, as to what a stock market is about. You know what is, you know, uh, you know, a you know, a public listing, okay, involved. What was an IPO? Actually, I conducted many, you know, group studies, and make some speeches, okay, to some Chinese companies. They were very interested. They put together a group of people including research analysts and so on to study about capitalism. That was actually in the mid-‐80s, you know. So I had been doing that kind of work for sort of four or five years.

0:9:40 In fact, I tried to bring a Chinese company to the stock market in the late 80s, but because of the world wide market crash in October ’87, so the Chinese, uh, these Chinese companies were scared, I mean, they thought it was, you know, quite risky, the stock market was quite risky. Not the investors, but the Chinese companies themselves. 0:10:14 For investors, they were seeking for opportunities, investment opportunities, and also diversification as well. So they were quite willing to invest in Chinese companies, okay. Umm, well, and then, 3 after October ’87, we had the Tiananmen Square event in June 4th, 1989, right, so my work has been interrupted by, uh, the market crash and also the Tiananmen Square event, right.

0:11:00. Really, the breakthrough was in 1992, okay, there was a big breakthrough when, in 1992, when, uh, uh, the, uh, the leader, Deng Xiaoping, visited Shenzhen and make a speech in Shenzhen and wanted, you know, China to advance the reforms. So, suddenly, then, um, Chinese companies wanted to move quickly and also investors really wanted to get into China. 0:11:40 Because, after the Tiananmen Square in 1989, okay, people was not sure about the political situation there, was not sure about uh, the continuation of the economic reforms, okay. Um, but…the um, the speech made by Deng Xiaoping in Shenzhen in 1992 really, have removed a lot of concerns and uncertainties.

0:12:18. Although before that, I have already, okay, helped two Chinese companies to seek listing, by backdoor listing, not by IPO, but by backdoor listing. The first one was Citic Pacific. Citic Pacific actually came to Hong Kong in the mid-‐80s. As you may know, Citic is a group set up by the State Council in the 80s, to try experience capitalism, and use Citic to assess the international capital markets. In fact, Citic did the first international bonds. Of all the Chinese companies, you know, it was the first one who assess the international market. So Citic came to Hong Kong earlier, and also with the specific mission to assess the international markets and channel capital into China.

0:13:30. So, Citic was the first one I helped to seek a listing on the Hong Kong stock exchange. Citic obtained its listing in rly 1990, in ea 1990. As I mentioned earlier, it was a backdoor listing because, you know, they were not really that ready at the moment, so they wanted to get a listing by backdoor listing and gradually inject their assets into the lister vehicle. So it was still a learning exercise for Citic.

0:14:11. Whispering in the background: Get him to explain backdoor listing. Just you know, explain backdoor listing.

QUESTION Oh! If you could just define what backdoor listing means.

0:14:21 FL Well, okay, uh, I mean, usually companies seek listing by way of an IPO, okay, Initial Public Offering. It offer shares to the public, it issue a prospectus to the public and so on. That is the normal route to, um, to listing. Backdoor listing is listing by way of acquiring an assisting listed companies, mainly a shell company, relatively inactive listed shell, and then the controlling shareholder gradually inject its assets into the shell and make the shell bigger and more active, okay. That’s how Citic, you know, turned the lister’s shell they acquired into Citic Pacific, right. 4

0:15:21.

QUESTION So this was like the guinea pig, but then after ’92, was the –

0:15:26. FL Ah, I’m sorry! The Citic listing, okay, was done in 1990, early 1990, before the Deng Xiaoping visit. Well, at that time, um, uh, the management of Citic Hong Kong, led by Larry Yong, okay, considered that, um, it was actually a good opportunity to acquire a listed shell in Hong Kong because the market was a bit depressed after, uh, the, um…Tiananmen Square events, but Citic mission was really to help China develop, and Citic has no real concern about the political situation in China, they were always really confident that China would continue to, to progress. 0:16:27. So, in fact, they took advantage of the depressed market condition and acquired a listed shell and acquired some assets in Hong Kong, and inject into the listed shell. Um, in fact, um, this move was very successful. The market loved that. 16:53. And also because Citic, uh, I mean, Citic was even at that time a well-‐ known Chinese company because it was directly owned by the State Council, right, it had a special status. So the backdoor listing of Citic Pacific was very successful.

0:17:14. And then I helped another Chinese group based in Hong Kong, Guangdong Investment, okay, also to seek a listing by way of backdoor listing. That was in 1991. 0:17:28. In fact Guangdong Investment bought a list shell earlier than Citic. They bought a listed shell in late 80s, but they had not made use of the listed shell. As I said, they were still trying to learn, right. But when they, um, uh, when they saw the Citic backdoor listing was very successful, um, so they wanted to activate their shell company as well. 0:18:03. So I discussed with them, I approached them, I proposed some ideas to them. They also follow a similar route, inject some of their assets into the shell company and turn that company into a very active conglomerate.

0:18:20. The first IPO, okay, actually came in 1992, the time I just mentioned. It was about the time when Deng Xiaoping visit Shenzhen, okay. After the backdoor listing of Citic and Guangdong Investment, investor’s interest in the Chinese sector have grown quite rapidly, okay. 0:18:56. So I thought that was a good timing to bring Chinese companies, to bring more Chinese companies to the market, and use the IPO route instead of the backdoor listing, okay. Because I think, the other Chinese company have observed the success of Citic and Guangdong Investment, so they wanted to try, okay, to get listing as well. And I told them that actually they could directly go to the stock market instead of buying an existing shell company. They don’t have to go through a backdoor listing, okay.

0:19:41 In fact, the first group, okay, who did an IPO was the China Merchants Group. Merchants Group actually, uh, was a very major group. In fact, this group had its origin in 5 the Qing Dynasty, yeah. This company actually exists before the Communist Regime. 0:20:16. Originally its base was in Shanghai, and then it moved to Hong Kong many, many years ago. They have quite a lot of overseas investment and assets. But again, when, you know, I talk about listing, talk about going to capital markets, they were very cautious, okay. They only took a very small company within their group to go public. 0:20:47. That company actually manufactures paints for roads painting, indoors painting, umm, ships and so on. Actually that was a small company within the China merchants group. 0:21:05. But they wanted to experiment the capital markets, so they took a small company and let me do the IPO for them. 0:21:18. So initially this company was not branded under the China Merchants name. This company has its own name called Haihong. Only when they felt comfortable about the capital markets two or three years later, they renamed this company into China Merchants International, which is one of the blue chips company now in Hong Kong.

0:21:54. By the way, let me just say a few words about the meaning of red chips.

0:22:04.

QUESTION Yeah! We need that!

0:22:07 FL How the name came about, right. I mean, you know blue chips, right, I don’t have to explain to you what blue chips are, right. I mean, when I brought more and more Chinese companies to the Hong Kong market, it forms a special sector of Chinese companies. Um, and people tried to differentiate these Chinese companies from the Hong Kong companies. For Hong Kong companies, for the major Hong Kong companies, we call them blue chips. But then, because of China, we usually use red to represent China, right. You see, our national flag is red in color. So people just call this group of Chinese companies red chips, as against, you know, Hong Kong companies, blue chips of Hong Kong companies. That’s how the red chip’s name came about.

0:23:12.

QUESTION Was there a sense of irony because of course red is also the symbol of Communism, you know, of the Communist Party. Were people using it that way?

0:23:20. FL I don’t think that people use it in a negative way. No, people always use red to represent China, not in a negative way.

0:23:31.

QUESTION So this was going on through, I mean, this was your primary work through the ‘90s, is that right?

0:23:35 FL Yeah, in the early ‘90s. Let me explain another category of Chinese companies to you, okay. I mean, um, uh, we have, you know, the traditional Hong Kong companies, we call them, for the major companies we call them blue chips, right. And then we have another sector, the red chips, right. As I explained earlier these red chips are companies incorporated outside of Hong Kong Note: [ I think he means “incorporated outside of China” here.] but has this China origin, you know, or they are controlled by Chinese government, whether the municipal government or the provincial government or the central government, right. 0:24:16. Um, but, they are incorporated in Hong Kong, so we treat them as Hong Kong companies, okay. There’s no, I mean, no technical hurdles in listing this kind of companies, right.

0:24:31. But still, this type of Hong Kong-‐based Chinese companies, okay, are very limited in number. Many of the Chinese companies are in China, based in China, right. Those state owned enterprises like, you know, Petro China or China Mobile, ased actually they are b in China. But in the early days, okay, um, I mean, um, there were no rules or laws to govern the listing of Chinese companies offshore. 0:25:07. And, uh, international investor had lent very little assets to the Chinese market, okay. At that time, the Chinese domestic markets, the Shanghai and the Shenzhen domestic markets, opened to international investors in a very limited way. They create another class of shares called B-‐Shares.

0:25:36 B-‐Shares versus A-‐shares. Okay, -‐ A Shares are domestic listed shares of Chinese companies in the domestic market, in the Shenzhen market and the Shanghai market. These are called A-‐shares. But some domestic-‐listed Chinese companies had also obtained approval to issue another class of shares called B-‐shares, which are [unclear: coded? Coated?] and traded in the domestic stock exchanges, but offered to foreigners, only foreigners who have the foreign currency can buy and -‐ trade the B shares on the domestic market, on the Shenzhen market or the Shanghai market. Not on the Hong Kong market. The red chips are traded on the Hong Kong market. Red chips are not traded on the domestic stock exchanges, okay.

0:26:38 But the B-‐share experience was not successful, because initially the many of listings on the domestic market were of poor quality. Companies quality were poor, corporate governance, and transparency and so on, and also Chinese accounting rules and standards were different from the international rule and standards, okay. So it was really an experience. 0:27:11. However, Hong Kong had always adopt higher standards, okay, in reporting and in corporate governance and so on. So, international investors always had 7

greater confidence in companies listed and regulated in Hong Kong rather than those companies listed in the domestic market. So B-‐shares were not that active and were not that successful, whereas red chip was very successful, alright, and create a class of its own.

0:27:52 But, as I mentioned earlier, the number of Chinese companies based on Hong Kong were limited. I was looking at the bigger market, and really the domestic market. So how to get the Chinese company to come to Hong Kong and issue shares in Hong Kong was really a big exercise.

0:28:18. At that time, the stock exchange was chaired by Mr. Charles Lee. Mr. Charles Lee is a good friend of mine. Actually, he’s a lawyer, but he’s very well known in Hong Kong and has contributed a lot to the development of the stock market here. 0:28:44. And he actually visited the Chinese government and visited Vice Premier Zhu Rongji around 1991, 1992, and suggested to Zhu Rongji that China should allow its local companies to go overseas markets, to issue shares in the overseas markets, and raise capital from the overseas market. And he suggested that the companies should come to Hong Kong.

0:29:22 And Zhu Rongji thought that was a good idea and accepted his proposal and immediately, you know, Zhu Rongji direct the various government authorities to form a working group with the Hong Kong regulators in the Hong Kong stock exchange and the SFC [Securities and Futures Commission], to form a working group – I was also a member of that group – to study certain…how to overcome certain technical hurdles, like how to let the Chinese companies to comply with the Hong Kong rules, how to meet the Hong Kong standards, and so on, right.

0:30:05 And then, the Chinese government selected a first group of nine candidates to allow them to experiment, to assess the international market, using domestic incorporated companies versus the Red Chips. The red chips, as I mentioned earlier, were companies incorporated outside of China. I’m talking about those domestic companies, which are mainly state owned enterprises; they are incorporated in China and issue securities in overseas market. So, the first one came to Hong Kong in the middle of 1992. That was after the listing, the IPO of Haihong I mentioned earlier. Haihong actually, Haihong’s IPO happened in March 1992, whereas the first listing of Chinese incorporated companies in Hong Kong was June 1992.

0:31:20 And we call this class of shares H-‐shares. H represent Hong Kong, it’s the alphabet, you know, H, Hong Kong. And also at that time, some companies went to the US. So that class of shares was called -‐ N shares, because N represent New York. But now, not that many companies you know, go to New York listing now, because in particular after the Sarbannes-‐Oxley legislation, many companies thought that it was too troublesome to go the US. And also, Hong Kong gradually has developed a home market for international 8

listing of Chinese companies, and they find out that these big state owned enterprises can raise huge sum of capital even just by Hong Kong listing. They didn’t really need to go US to have a listing. Though some of Chinese companies have list their shares in New York now, mainly through [unclear; 32:44] instead of N shares. So this is another class of shares, okay, H shares.

32:54 So basically there are three classes of Chinese company shares. One is red chip. The other one is H shares. These two are listed in Hong Kong. There is another class called B shares. B shares are listed in the domestic stock exchanges in China but are available to foreigners. Originally only available to foreigners, but gradually because of the opening up of Chinese market, and also because of the accumulation of reserves in China, China also now allow local residents who have the foreign currencies to buy into B shares now. But basically, no companies has issued any B shares in the last 10 years now. This class of shares now still exists, but no more companies issue B shares because, as I said, it’s not successful experience, the turnover of B share is very poor compared to H shares or red chips.

34:11 Um, so that’s the first experience. Originally, when Chinese companies come to Hong Kong, okay, they need to get government approval. Actually the government select the candidates, alright. The selection process is not determined by the market. It is not dictated by the investment bank as to which companies would appeal to investors. The selection process was dictated by the Chinese government. So who has the political connection, who can go to Beijing unclear] and lobby the [ and get the approval, or which companies need the capital then they went to Beijing and get the approval. And the Chinese government just published a list of candidates and the investment bank just call on their doors, try to get the mandate.

0:35:12. But then, gradually, the Chinese government found out that this process, non-‐market selection process did not work, because sometimes they select companies which may not appeal to the market, or because the market taste has changed. So some companies, they have selected may never be able to go to the market because of the change of the taste of the market. So, gradually, the Chinese government abandoned this selection process and just say that, okay, whoever is ready, can go Beijing to seek the approval. So this IPO process is more market orientated. 0:36:07 I think since…um….about 1996, 1997, so in the first five years or so, the selection process was government dictated. So this s i also a progress. The Chinese government has learned to be more market orientated.

0:36:33. QUESTION Speaking of ’97, leads to another question we wanted to ask you, you know, looking back on the 30 year period, one key moment is obviously the Asian crisis, the financial crisis in ’97, ’98. So here in Hong Kong with your work you were obviously directly impacted. Maybe you could talk about – that first your own experience, but then also what was the ripple 9 effect, or not, on China, and how was that a key part of the bigger boom we’ve seen over the thirty years.

0:37:10 FL Okay, now, uh…the bigger boom actually started around 1997. Okay, actually the successful experience of listing of Chinese companies has expedite the corporate transformation or the corporate restructuring in China. Originally, when you look at the first batches -‐ of H shares, they, many of them were individual companies, or were regional companies, okay. However, when the Chinese government saw the successful of the capitalism experience, they wanted to use the stock market to expedite the corporate restructuring in China. And actually that was mainly – that was one of the reasons why Zhu Rongji wanted to experiment capitalism using the stock market. Because he wanted to use the stock market to improve corporate governance, to improve the quality of management, to improve transparency, to improve accountability. That was very successful, actually. Very successful.

0:38:51. Um, um, now, as I said in the early days, okay, many of the listings were regional companies, companies owned by the provincial government or municipal government. But in 1997, okay, China started to put together large state owned enterprises, tried to consolidate, integrate various regional companies. 0:39:28. For example, the first one, China Mobile. When China, uh, you know, developed the mobile phone business, they allowed each province to set up its own network. So originally, uh, the various mobile companies are more regional. For example, Guangdong has its Guangdong Mobile phone company. Guangdong province put up the money and invest in the infrastructure and had its own management to run its, you know, regional company. It doesn’t have a national company.

0:40:13 But then, when China Mobile came to Hong Kong and sought a listing in 1997, it used the red chip concept. It formed an overseas holding company, and inject into this newly incorporated this overseas company – an empty company – certain provincial network companies, for example, Guangdong or Zhejiang. Those prosperous provinces, those regional mobile phone companies which were profitable were put together under a newly formed holding company, and then they list that company in Hong Kong.

0:41:11 So, um, then they started to form a national company. That’s why in China, we said that for certain big state owned enterprises, we had the sons before the parents. Because those provincial companies was formed first, and because of going to public, they formed a holding company and put certain provincial companies under this holding company. And gradually, when China, you know, continued to grow, many of these provincial companies have become profitable, these companies were also injected into the lister vehicle subsequently. Until now, all the regional mobile phone companies are put under a single company now, China Mobile, which is listed in Hong Kong. So that processes, as I said, 10 facilitated the integration, the consolidation of the mobile phone industries into one single company.

42:39 So, the stock market experience has also helped the corporate restructuring and the transformation of certain industries. But because of the success of the listing of China Mobile, China tried to experiment the same thing in the other industry, like the oil and gas industry. PetroChina was formed along the same way. And SinoPec, and so on. And many, many state owned enterprises have been formed as a result of going into..um.. international. Going to tional interna capital markets. And also, they find that they actually need to integrate regional companies and that would help the state to control industries and the state owned corporations as well right.

0:43:58 Well, um, nowadays, actually, we don’t see that many red chips now, because the Chinese government actually do not favor, do not encourage listing by way of red chips. The reason is because, as I explained earlier, red chips are companies incorporated outside of China. So China has not much control or influence, or more difficult to exert control on Chinese companies, right. So, uh, since 1997, um, China, the Chinese government actually has introduced many rules and regulations and make red chips more difficult to..to, to, to, to operate, to get a listing on the overseas stock exchange.

0:45:04 QUESTION And did you sort of shift your focus and model based on the fact that the red chip story was…

0:45:09 FL Yeah, that’s right. Yeah, as I said because the markets in China, there are not that many Hong Kong based Chinese companies. Although in the second stage, when I move to China, I used both models, both the H-‐share model as well as the red chip models. I helped certain companies, including provincial companies and private enterprises to move their assets in China, their business in China, into foreign incorporated companies outside of China. And that’s why the Chinese government does not like that, because we move the domestic assets or business to foreign incorporated companies. They thought that they would lose control. So they want to stop the process or slow down the process. Now, they would only allow listing of H shares, not so much red chips now. But red chips really pioneer the listing of Chinese companies.

0:46:29 Now, in fact, I mentioned earlier, the formation of large state owned enterprises as a result of the going public process actually has helped the Hong Kong stock market to develop. Because, well, the Hong Kong economy, the Hong Kong stock market, actually has become mature. That’s why we need to find candidates from elsewhere to seek listing on the Hong Kong stock exchange. So that’s why Charles Lee, the chairman of stock exchange in the 11

early ‘90s went to China to convince the Chinese government to let Chinese companies be listed in Hong Kong. Because that is really the future of the Hong Kong stock exchange.

0:47:29 Um, originally, as I mentioned earlier, that may of the Chinese companies are of regional nature, they are not very big in size, the first really big major national companies which came to Hong Kong was China Mobile. I mentioned, I told the story earlier. And these big state owned enterprises actually attract more and more investors to the Hong Kong stock market, and also attract the international, the global investment banks to come to Hong Kong.

0:48:12:18 Originally, for example, the Hong Kong market actually was dominated by UK merchants banks, not US investment banks, in the 70s, 80s, and early 90s, because I think at that time the American firms consider the Hong Kong market too small for them. They were not interested. But when more and more Chinese companies had come to the Hong Kong market and these Chinese companies had attract more and more investors interest, then US investment banks started to move to the Hong Kong market. So that is another transformation of the Hong Kong investment banking industry.

0:49:11 QUESTION Um, I don’t know, we have three minutes and your time is probably running out, but if you could say something about jumping forward to sort of the current moment. We’ve talk about these crises – the 87 crash

0:49:25 FL Yeah, the history. Yeah.

0:49:27 QUESTION So, looking at it now, what is the current financial crisis telling us about China’s model and China’s boom? What is apparent now that wasn’t apparent before? Where is China now in its development?

0:49:46 FL Right, right, okay. I mean, um, now, actually, um, uh, the, um, Chinese companies, the China sector has outperformed the index, and has outperformed Hong Kong companies. Because the general view on China is that it will come out from the global recession earlier than many countries and to a certain extent, China was not much affected by the global recession because China has this large domestic market and also China has put together a very large stimulus to prop up the economy. And also, for example, the Chinese banking sector is not really affected by the financial crisis because Chinese banks are not that 12 internationally orientated or Chinese banks have not put a lot of their assets into overseas markets, so they were not affected by the financial crisis in the west.

0:51:44 So, um, China, the China sector is a very favorable. It is one of the favorites investors. Again, I think as far as future listing of companies on the Hong Kong stock market is concerned, I think Chinese companies will continue to dominate the IPO market, just because the number of companies in China is many, many times that of Hong Kong.

0:51:22 [TAPE SWITCH]

0:51:55 QUESTION Yeah, maybe, one thing in these interviews that we like to hear is thinking about, you know, stepping back and looking at the 30 year period as a whole. So you’ve talked in detail about certain key moments, especially with the red chips. When you step back and look at the transformation of Hong Kong and all the parts of China that you have traveled to and dealt with, how do you explain it to yourself? How do you answer the question: why did this happen? What for you are the main triggers?

52:30 FL Yeah, yeah, okay. I think, uh, you know, one of the reasons why we have seen such an economic miracle happen in China in the last 30 years is the open-‐mindedness of the Chinese government. The Chinese government first of all set up the stock exchange when it discovered that its domestic stock exchange not really work, they all their companies to go international to learn about the international experience and use the international standards to upgrade their standards, to upgrade the management, the management system, the, the, corporate governance, and so on. I think actually that helped the reforms and the progress of the state owned enterprises as well. 0:53:40. And the overseas listing not only allowed Chinese companies to get access to international capital. I think the experience also helped the reform of the Chinese sector, the state owned enterprises and many industries as well. I think that is important.

0:54:03 And then, I think another reason why the Chinese economic reforms is successful compared to many, many other emerging markets is the role Hong Kong has played. I think that is very important in two aspects: Capital. Human capital as well monetary capital. Hong Kong helped Chinese companies to raise billions and billions of dollars to help the economic reforms in China and bring the monies back to China in many sectors. The human capital is very important as well. Like, ourselves in the investment banking industry. We provide services to Chinese companies and help them to raise capital and help them how to know, uh, uh, uh, improve their management system and teach them about the importance of corporate governance. I think this is very important to the development of the Chinese companies. 13

0:55:16 And also, many Hong Kong entrepreneurs have moved their operations, their companies into China and they employ millions of workers in China. As I told you earlier, the first phase of the China experience or the China concept was the movement of Hong Kong companies into China. This Hong Kong money and expertise actually has helped in particular the development of the Pearl River Delta. This is why Guangdong is so, you know, uh, uhh, prosper and modernize than many provinces in China. I think overseas Chinese in particular, Hong Kong Chinese played a very important role in the modernization and in the reforms of China.

0:56:17 QUESITON And, last question: what’s your, when you look in the crystal ball, what do you see happening next? There’s a 30 year period celebrated 2008, we’re in the middle of a global economic crisis, we don’t know what’s coming next, but from your experience based in Hong Kong, dealing with China for 20, 30 years, where is China going economically next? Do you see a new phase beginning?

0:56:45 FL Well, first of all, as far as the relationship between Hong Kong and China is concerned, I think there will be more and more integration, I think Hong Kong will become more and more integrated into China. And one of the reasons why Hong Kong is less affected in this crisis than in the Asian financial crisis is because of China. Now, we have a very strong backer and a big market, and also a lot of Chinese tourists come to Hong Kong and spend their money in Hong Kong. Now, I think Hong Kong has benefit from China. Originally, Hong Kong helped China to modernize. Now, Hong Kong has recently benefit a lot from the economic prosperity of China.

0:57:45 Now, going forward, I think Hong Kong will economically, rely more and on China. And also I think, actually, Chinese companies, and also local management expertise have learned very rapidly and, um, well, to a certain extent now, you, the domestic market may become a competitor to Hong Kong. And actually we have seen that, now in particular with the help of the Chinese government. 0:58:20. As I mentioned earlier, the Chinese government does not really encourage the listing by way of red chips, right. Now actually the Chinese government wants to promote the development of the domestic market. I think that certainly is the right move , for them I mean, originally they used the help of Hong Kong and other overseas markets to help the development of capitalism of capital markets in China.

0:58:46 Now, they have learned a lot about capital markets now. They should focus on the development of the domestic markets. So right now, for major state owned enterprises, the Chinese government insists that they have to issue both A shares 14 and H shares. Previously,

many companies just went straight to the international market without issuing shares in the domestic market. They didn’t bother. But now, the Chinese government wanted them to issue shares in the domestic markets as well because they want to upgrade the quality of the stocks listed in the domestic market. And also, right now, because of supply and demand, the valuation in China for the same company is higher than in Hong Kong. Many of the A shares are traded at high multiple than their counterparts listed in Hong Kong. So actually many companies now are willing to list their shares in the A share market.

1:00:01 So going forward as far as the capital market is concerned, I will see faster development of the domestic markets. And I will see more products to be developed in China as well, not just ordinary shares, but the bonds market and perhaps in future, commodities market, you know, um, uh, derivates market, futures, and so on. I see more and more products brought to the market. But this process had been slowed down by the global financial crisis, because certainly China wanted to, you know, see what happened to the west out of all this derivative problems before the introduce these products in China.

QUESTION Great, thank you so much Mr. Leung.

[Two minutes of polite small talk follows. Then the tape ends at 1:02:25.] -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐

*The full -‐length video of this interview is available in the online repository of Rutgers University Libraries: http://rucore.libraries.rutgers.edu