“The New Era of Opportunity”
China’s Financial Markets IV Afternoon Keynote Address

Catherine Kinney
President and Co-Chief Operating Officer, New York Stock Exchange

New York, September 28, 2005

Ladies and gentlemen, thank you for inviting me.  I appreciate your invitation and the opportunity to speak to this prestigious group.  The Asia Society is an important bridge-builder that has been in the forefront of strengthening ties between our two regions of the world.  Your mission becomes all the more significant given the leadership role that we both play in the global economy.

Through the years, our two regions of the world have been the strong and sturdy engines of the global economy.  In both good times and bad, growth in the U.S. and Asian economies has consistently outpaced other regions of the world.  Not surprisingly, Asian financial markets have benefited from robust and rising capital inflows – as capital always flows to where it is wanted most and treated best. 

The prospect of strong, earnings growth and attractive prices is making Asian equity markets a top destination for portfolio inflows among emerging markets.

Despite the difficulties of high, energy prices that weigh upon us all, strength is apparent across the Asian economies, and within their rapidly developing and maturing capital markets.  We see impressive strength from India to Thailand, Singapore and Japan, across the Pacific Rim to South Korea, Hong Kong, China, and Taiwan.  Investors are rewarding forward-looking, efficiently-run companies spurred by market-driven policies that put the emphasis on incentives and competition for growth and prosperity.  To cite the three most prominent:

- India, led by its brilliant Prime Minister, Manmohan Singh, is rapidly emerging into a global economic powerhouse. 

- Japan is rising above adversity, and regaining its dynamism and leadership of old.  Japanese voters have rewarded Prime Minister Koizumi’s courageous commitment to a broad-based agenda for structural reform, recovery and resurgence.

- For its part, China’s nearly double-digit economic growth rate has been the fastest in the world, and China’s economy has captured the imagination of the world.  Chinese President Hu Jintao urged business leaders at the 2005 Fortune Global Forum to take full advantage.  “China’s economic growth,” he said, “has and will continue to bring win-win opportunities to Asia and the world.”  I think the word “opportunities” was well chosen.  In fact, “opportunities” would seem to describe perfectly the environment between our two nations.

Frankly, I’ve never known a more exciting and promising time.  So, I want to speak today about this historic moment for mutually beneficial opportunities between China and the U.S. within our capital markets.  There is a fabulous future that we can envision and endeavor to build together.  There are also challenges that we need to acknowledge frankly, and do our best to rise above – and I’m confident that we will.

So let’s look at both.  For starters, and to get a sense of the opportunities developing within our capital markets, we need only look at the investments being made on both sides of the Pacific.  Foreign direct investment rose by over 13% to $60 billion in 2004, as China’s infrastructure continued to strengthen and the business environment continued to improve since it joined WTO.  In our own marketplace, we have seen a significant increase in the demand for Chinese equities from U.S. institutions and investors.  Trading has increased from 500,000 shares a day in 2002 to 2.6 million shares a day in 2004. 

To give you a sense of our marketplace, the New York Stock Exchange is the world’s largest equities market – larger than any other by a factor of five.  We provide a trading venue for over 90 million investors, over 2,780 listed companies and a market cap that exceeds $20 trillion.  The companies that list on the New York Stock Exchange are best of breed in their industries and in the world.  They are companies that span the Americas to Europe, the near East, to Asia and the Pac Rim.

What unites them all is performance and leadership.  They compete at the top of their industries, and on the edge of tomorrow’s world.  I’m not divulging state secrets when I tell you that as part of my job I meet with the CEOs of many of these companies.  I can tell you that to a man – and, increasingly, a woman – they all discuss the need to have a Chinese strategy, a plan for discovering the Chinese market.  They see in China today incredible potential to participate and to contribute to one of the great economic stories of the 21 st century.

I couldn’t agree more.  When I was in China last year with John Thain, we met with the Chinese leadership and came away convinced of their commitment to the global economic community.  When China joined the WTO, and assumed the obligations of membership, it sent a very positive signal.  That was good for China and good for the world.

From our own position and perspective, the New York Stock Exchange seeks to play a constructive role as China’s partner for progress.  I’m happy to say that we have an excellent relationship and that, just as in our respective economies, there is tremendous potential for growth. We first became acquainted in 1986, when our then Chairman, John Phelan, visited China and met with Deng Xiaoping.

In October 1997, President Jiang Zemin made a return visit to the Exchange and rang the Opening Bell.Three years ago, on April 29, 2002, we welcomed then Vice President Hu Jintao.  When he came to visit us, he expressed great enthusiasm and said, “We in China want what you have.  We want very robust, capital markets.”  In 2003 (November), Premier Wen Jiabao also visited the Exchange and honored us by ringing our Opening Bell.

We’re providing guidance, counsel and support.  We are listening, as well.  Next month, John Thain and I will return to Beijing, Shanghai, and we will visit India, as well.  This is a return engagement, so to speak.  Last year, John Thain’s first official international visit as NYSE CEO was made to China, where he had the honor of meeting with Premier Wen along with many other government and corporate leaders. 

Today, there are 450 companies from 47 countries outside the U.S. listed on the New York Stock Exchange.  Thirty of those companies are listed from the Greater China region, including 16 from Mainland China, nine from Hong Kong, and five from Taiwan.  Their market cap exceeds $365 billion.

China is the largest source of listed companies from the Asia-Pacific region – from that region we have a total of 80 companies representing 10 countries.  We tell our Chinese friends, and those from other countries, that their primary market should always be their home market.

However, when Chinese enterprises seek to expand beyond their borders, when they seek to access a global market, the New York Stock Exchange will be their best partner, indeed, their indispensable partner.

Let me cite the example of China Mobile, which listed on the New York Stock Exchange in 1997.  Through raising equity capital, China Mobile was able to acquire assets, build a nationwide mobile network and become the world’s largest, mobile phone operator.  When Chinese companies like China Mobile list on the Exchange, they gain important benefits and access unmatched by any other market in the world.

Starting with the best, overall market quality.  For example, the New York Stock Exchange sets the best price 89% of the time compared to other markets that compete for order flow in NYSE-listed stocks.  Using the SEC’s methodology, our trade execution costs are lower than comparable Nasdaq stocks.  The New York Stock Exchange also provides deeper liquidity, and significantly lower volatility, which reduces a company’s cost of capital.

These are all important metrics that make the case of superior market quality.  This is good for investors and issuers alike.

In addition, companies listing on the New York Stock Exchange gain right of entry to the largest pool of capital in the world; the opportunity to strongly diversify their shareholder base, and to participate in global mergers and acquisitions.  Along with these benefits, our listed members assume responsibilities that make them stronger global enterprises.

We work closely with every company to ensure that they meet the highest internationally recognized standards of corporate governance and disclosure.  I have found that Chinese companies very much want to be seen as companies that reach the very highest levels of corporate governance.  It’s clearly a strategic advantage, and viewed as such, to be in compliance wit the high governance standards that accompany registration in the U.S. market and on the NYSE.

That includes helping them to operate daily, and without exception, with international standards for finance, accounting, corporate governance, auditing and full transparency.  As they meet these standards, Chinese companies become more integrated within the global economic community.  They enhance the viability and strength of their commercial brand.  And they earn the most precious currency of all – which is confidence of the investing public.  Today, American investors have a very healthy appetite for investing in Chinese companies—and companies from the Asia-Pacific rim.

As investors commit more capital to finance Chinese enterprises, China can move that much faster to advance its goals of economic and political liberalization.  More jobs, growth and prosperity for the Chinese people.

Now, and importantly, as we work with each company, and as we ensure them the highest standards of market quality – the deepest liquidity, lowest volatility, tightest spreads and best prices – we recognize there are additional changes we must make to provide our customers the world’s premier, financial marketplace.

The rapid pace of change in today’s markets demands that we also offer our customers the very best marketplace in terms of speed and innovation.

That is why we are building the Hybrid Market to offer investors a choice between the sub-second speed of electronic trading, and the price improvement and best value that are the hallmark of the auction market.

That is why we are taking the historic step to become a public, for-profit exchange, by merging with Archipelago, which is an outstanding entrepreneurial company that is pioneering leading-edge platforms and products.

Just to give an example, one important, recent innovation has been the growth in popularity of our Exchange Traded Funds.  These are unique instruments that range from industries and natural resources such as energy and gold, to composites funds from different exchanges.  Last year, we introduced the first, China-only exchange traded fund.  It tracks the performance of the largest and most widely traded Chinese stocks, by mirroring the FTSE/Xinhua China 25 Index – the top Chinese stocks available to international investors by total market capitalization.  I’m happy to report that both ETFs in general, and the FTSE/Xinhua Index in particular have been among our most fastest-growing new products this past year.

These are the kinds of initiatives that we look to expand through our proposed merger with Archipelago.  We want to see Chinese companies benefiting from the best possible marketplace.

At the same time, we want to enable investors to participate to the fullest, extent possible in great and growing Chinese companies.

As we strive to do everything we can in our own marketplace, we are looking to the leadership in China to do what it must to spur the growth of its capital markets, supported by an equity culture that values ownership.

Fifteen years ago, only an estimated 100 million people on the planet owned a share a stock or had a pension plan.  Today, the number of shareholders exceeds 1 billion.  Think of it!

The upside is that as more Chinese become shareholders, they will accelerate the transformation of China’s financial markets, and create new business structures and modes of operation.  State-owned and controlled bank financing will give way to diversified capital markets and to new banking and equity markets.

Obviously, robust and efficient capital markets are never built overnight.  They must evolve.  They must grow from a sound foundation that includes infrastructure that deploys advanced technology, a regulatory framework that can maintain investor confidence, and the ability to unite investors and issuers in the most efficient, possible manner.

I would also add that the exchange of information, that high degree of interest and personal commitment to understanding speaks well for the relationship that exists among our respective people, markets, businesses and government leaders.  It is a relationship that is sound and growing.

When capital markets do it right, and can function freely, they serve as the vital, financial bridges to investors and companies.  Today, China’s domestic capital markets are in a growth phase.  They are still small relative to the size of the economy.  However, there are ways to ensure that these markets evolve to meet the needs of China’s emerging investor class.  There are ways to ensure that China’s current capitalization ratio, approximately 45%, can rise to the levels of developed markets in the U.S. and Japan, which are close to 150%.

Asset managers, who will represent the interests of Chinese savers, investors, pensioners and insurers, need to be given access to examine companies’ balance sheets.  They will need to compare the performance of competing companies and to provide investors with accurate data.  For their part, companies will need to become world class in everything they do.

Everything from increasing shareholder value, and gaining market and mind share, to complying with internationally recognized standards for finance and accounting, and ensuring the transparency of their books and integrity of their operations.  And government leaders will continually need to reassure investors that China remains committed to reform.

Investors will want to be sure that China remains committed to a market economy, that markets will be open, liquid and transparent, that banking and equity markets will be well-regulated, and that property and shareholder rights will be protected by the rule of law.

We cannot build successful entrepreneurship without ensuring property rights.  And we cannot ensure property rights without the rule of law.  The rule of law is of central importance if capital markets are to attract the participants, and to develop the breadth, depth and liquidity necessary to compete in the world of finance and commerce.

History assures us, again and again, that when the rule of law is enshrined as the cornerstone of a free economy, confidence will be bolstered and capital flows will follow.  I am happy to note that we see progress on all of these fronts.  U.S. Corporations today are willing to do business in China and investors are willing to invest because there is underlying trust that China will ensure the inviolability of contracts. And that is reassuring.

Indeed, and ironically, the main threat to the Chinese economy today may be its robust strength.  Chinese capital markets that lack liquidity risk falling prey to extreme volatility – much as we saw on the Nasdaq in the late 1990s, when that marketplace lost half of its values following the Internet bubble.  I hope I’ll be forgiven for pointing out the New York Stock Exchange is a far less volatile marketplace.  That translates into a lower cost of capital for issuing companies.

In fact, when 50 companies transferred from the Nasdaq to the NYSE recently, their volatility dropped by half of what it had been on the Nasdaq.  It is imperative that the equity culture that is growing throughout China retain its confidence in the Chinese economy and its capital markets.

We want to see the growth of China’s economy and capital markets progressing hand-in-hand.  We want to see China’s capital markets being considered the primary markets by your corporate leaders.  And, if there are any impediments today – such as restrictions on issuers on selling shares in China’s domestic markets – then hopefully they will be dealt with.

Sometimes we can learn from others.  For example, in the 1990s, India’s policy makers issued new rules to strongly encourage Indian issuers to go public in the domestic market first, and not in the U.S.  That decision was very beneficial for the growth and development of India’s financial markets.  One, other possible impediment to consider is government-owned stock in Chinese companies that is overhanging the markets.

As a result, investors may fear that that stock could be sold and depress prices. One, possible solution would be to set a clear timetable for sales so that investors can gain a better sense of certainty.

In every possible instance, we want to free markets to do what they will always do better than any government – and that is to direct investment toward the best, possible companies for future growth and profitability, and for jobs and prosperity.

To sum up, despite the challenges posed by painfully, high energy prices, our economies and capital markets continue to be resilient and robust.  We have historic opportunities to plan together, grow together and prosper together.

As we pool our resources to create a better future for China, here in the US and in China’s home markets, we can help China create a better future for the world.

Thank you very much and now I’d be pleased to take your questions.