Is Macau ready for a stock exchange?

Discussion of Macau’s potential to develop a stock exchange has been ignited by the recent announcement that Guangdong will help to accelerate a feasibility study and support the establishment of a securities market in Macau.

It would appear that a major new direction for Macau’s economy is under way.

We gathered opinions from a few experts recently on the subject, asking them important questions, such as:

  • What will be the impact of the establishment of the Macau Stock Exchange?
  • Is Macau ready, and what improvements are needed?
  • How will the laws of Macau need to be adjusted?
  • How can Macau develop this market in collaboration with Hong Kong, Shanghai and Shenzhen?
  • How does Macau advance the internationalization of the RMB?

These and other issues are covered here, in depth.

High starting point with fintech

Liu Chengkun, Director of the Institute of Sustainable Development of Macau University of Science and Technology and Professor of its Business School.

If Macau establishes a stock exchange, its products should include RMB-denominated stocks, bonds, and funds. However, the mainland’s technology and innovation enterprises, especially those based in the Greater Bay Area, are the ones most in need of financing, and because Macau has no capital controls, investors will inevitably be global traders.

Macau has its advantages in developing a securities industry. These include its well-developed legal system, freedom of capital movement, taxation system, and connections with the international capital market. The more obvious disadvantage is the small scale of Macau’s financial industry; Macau’s offshore RMB business is much smaller than Hong Kong’s. Also, human resources are lacking in related services, such as accounting, law, asset evaluation, and securities.

This is why the Macau Stock Exchange needs to be positioned in the short term as bond-trading platform, and focused on long-term development of companies, particularly science and technology enterprises in the GBA, as well as the Portuguese-Speaking Countries.

We will need to cooperate deeply with the authorities in Hengqin, as we will need the mainland’s support in this endeavor.

It will be an urgent priority to train and introduce securities brokers and related supporting professionals – those familiar with accounting, evaluation, and law of listed companies. We need financial-services talent, especially to facilitate cross-border mobility between Macau and other cities in the GBA. They must be equipped with financial qualification such as CFA and FRM, so that we can attract and guide more young students to enter the financial industry.

At the same time, we must grasp the impact of financial technology – fintech – on the stock exchange. The Macau Stock Exchange will need to be prepared to expand the scope of transactions it covers.

The upside benefit for Macau is big. Once the stock exchange is established, it can better promote Macau’s role as a financial service platform for interaction between China and Portuguese-Speaking Countries, widen the adoption of financial services that are currently only available to the banking industry, and add new financial products. Renminbi bonds and forward transactions will continue to attract high-tech companies from Portuguese-Speaking Countries to go public. Moreover, it will facilitate the outward expansion of Chinese companies, particularly along three paths: Brazil and Latin America; Portugal and the European Union; Angola and Mozambique, as springboards to Africa. This will help build more hubs in the internationalization of the RMB and promote the construction of the Belt and Road Initiative.

It will be necessary to clarify the exchange’s positioning with relation to the Hong Kong, Shanghai, and Shenzhen stock exchanges. The four cities will serve geographically diverse companies and customer groups with different financing needs. Hong Kong is an international financial center and the world’s largest offshore RMB center; Shanghai is a domestic and international financial center and important for the onshore RMB market; Shenzhen is a domestic exchange that is important for SMEs and technology finance; the Macau Stock Exchange can be a regional technology finance center. The four can complement each other.

Enhance RMB internationalization

Ye Guiping, Associate Vice President of the City University of Macau and Director of the Macao Social and Economic Development Research Center

The establishment of an RMB-denominated stock exchange in Macau would be a major opportunity for the financial industry in Macau, and would also provide opportunities for companies to boost cooperation between Portuguese-Speaking Countries and China.

In fact, ties between China and Portuguese-Speaking Countries have already enhanced the internationalization of the RMB. An RMB-denominated stock exchange here will enable the Chinese currency to be better managed in Macau and will inevitably result in rising deposit levels here. Investment opportunities will favorably attract investors, especially from countries along the Belt and Road Initiative.

Regarding its physical location, Hengqin might be better. It has more space. We need to see if such cooperation can be established.

Macau has some entities that can help form a solid foundation in the beginning. The most prominent of these are Nam Kwong Group and Bank of China Macau Branch, which could be restructured into independent legal entities (they are state-owned) and listed on the Macau Stock Exchange.

Moreover, Macau is the world’s largest gaming hub. Although some local gaming companies have already been listed in Hong Kong, they could return to Macau for secondary listings and contribute to the SAR’s financial development.

Perhaps the biggest source of potential listings, however, will be small and medium-sized startups from the GBA. There are currently 45,000 national high-tech enterprises in Guangdong, and only 600 listed companies from the mainland, which translates into about 1.8% of the total.

At the same time, the Portuguese-Speaking Countries bloc includes nine sovereign countries and four territories. Portugal and Brazil are well developed. Behind them are the Pan-European Exchange and the Brazilian Exchange, which together have more than 1,800 listed companies that can take secondary listings in Macau, like Alibaba did recently in Hong Kong. The Macau Stock Exchange can establish a communication mechanism with these two exchanges to facilitate the financing of high-quality listed companies in Portuguese-speaking Countries.

In terms of Macau’s legal environment, some challenges exist. Due to historical reasons, Macau uses a civil law system and adheres to industry-leading supervision and management in principle. Generally speaking, the financial systems dominated by capital markets such as New York and London follow the common law system. Therefore, to improve the securities trading system, the listing and issuance system and the conditions for listing and issuance, and to broaden the channels for capital entry in accordance with the law, the Macau Stock Exchange will need to establish an updated regulatory philosophy, innovate its regulatory methods, and adhere to strict supervision. This is vital to promote the regulated and orderly development of a securities market in Macau.

The accelerated construction of an RMB settlement center in Macau will also help advance the internationalization of the RMB, attract financial companies from all over the world, and enhance the status of Macau as a financial hub. The establishment of an RMB settlement center here will increase the range of investment channels available for hedging tools in exchange-rate risk management. We can offer a wider variety of RMB-denominated investment vehicles, grow the number of RMB-denominated insurance and wealth management products, and focus on developing a new offshore wealth management businesses aimed at Chinese enterprises and households.

Establish Macau as an RMB offshore sub-center

Shu Youjun, Deputy Chief Researcher, Asian Financial Think Tank, General Manager, Development Planning Department, Bank of China Macau Branch

Since the outbreak of the Hong Kong protests, there are already reports that many financial institutions have diverted funds and business to other regions such as Singapore. In order to enable the offshore RMB market to operate uninterrupted and smoothly, Macau has unique conditions to create an offshore RMB “deputy center” to Hong Kong.

But relying on Macau’s current clearing network and product system will not be enough. To promote the internationalization of the Renminbi and its use along the Belt and Road, especially in Portuguese-Speaking Countries, we must build a more comprehensive cross-border RMB trading system, particularly in regard to domestic repatriation, product issuance, and fund settlement.

The starting point must be to promote the use of the Renminbi as a trade currency with and among Portuguese-Speaking Countries. It can be promoted at the national level by signing bilateral currency swap agreements. This can further enhance the financial stability of both sides and have an effect on commodity prices, payment methods, settlement methods, and value, to a certain extent, in Portuguese-speaking countries.

Quotas can be granted based on relative weights of the respective economies, i.e., allocate yuan trading privileges according to bilateral trade volumes. The People’s Bank of China should ideally authorize a clearing bank in Macau to manage this, but it is also best to develop a regular assessment mechanism that is based on a variety of factors, such as economic structures, financial conditions, national ratings, and other measures of each country, to allocate quotas reasonably. If this works well with Portuguese-Speaking Countries, the model can be replicated with other Belt and Road countries.

The help of national agencies will be needed in speeding up the construction of Macau’s financial infrastructure in a comprehensive way. This will include:

  • Accelerating the signing of an RMB currency swap agreement between the Macau Monetary Authority and the PBOC to provide liquidity support for the RMB market in Macau;
  • Relaxing Macau residents’ RMB remittances and exchange limits to be consistent with Hong Kong residents;
  • Accelerating the creation of the “Investment and Financing Service Platform for Chinese-Portuguese-speaking Countries” project;
  • Promoting the use of RMB in Portuguese-Speaking Countries for investment and financing.

Already, the issuance of bonds has provided a breakthrough in connecting the onshore and offshore RMB markets in Macau. The first issuance of Treasury bonds by the Ministry of Finance in Macau will pave the way for more local governments and mainland enterprises to issue RMB bonds in Macau. Similarly, Macau is considering relevant preferential policies to encourage Portuguese-Speaking Countries to use local institutions to issue Panda Bonds in the mainland.

Macau can take its own initiatives as well. An example would be to designate banks in Macau as RMB direct market makers, i.e. conducting direct RMB transactions against the currencies of Portuguese-Speaking Countries, thereby promoting the use of the RMB in bilateral trade. This can help Portuguese-Speaking Countries grow their RMB reserves. Meanwhile, the development of the forward RMB foreign exchange market can help companies hedge risks due to interest rate fluctuations.

Finance is the mother of all industries

Tang Jizong, Member of Macao Economic Development Commission and Chairman of Macao Political Economy Research Association

If Macau sets up an RMB-denominated stock exchange, it will be able to cooperate with the “national needs” of RMB internationalization, and drive the development of Macau’s overall financial industry chain in the future.

The Macau Stock Exchange will help diversify the risks in the internationalization of the RMB, and its targets are different from Hong Kong’s: mainland, local, Belt and Road, and Portuguese-speaking Countries.

Finance, indeed, is the mother of all industries. The establishment of the Macau Stock Exchange will promote investment in RMB-denominated financial products, attract more capital reserves and help the banking system to develop. At the same time, it will attract talent in accounting, legal and other sectors. No to mention it will bring down financing costs for enterprises.

It will be essential to establish listing-related regulations from the ground up, as well as improve laws. This will lay the foundation for business rules, policy alignment and cooperation agreements with relevant regional financial institutions.

Talent in the financial industry is currently in short supply, and must be addressed. It needs to start at the top. The introduction of high-quality talents is an urgent priority.

Proposed Listing on the Macau Stock Exchange

Associate Professor Shen Yunqiao, School of Law, Macau University of Science and Technology

The lack of relevant laws covering securities transactions is a major obstacle to the construction of the Macau Stock Exchange.

Let’s focus first on the legal foundations for trading securities.

Securities laws should be set up at the start with a view to their needing to be updated quickly and easily at any time. With the ongoing development of the SAR’s capital market, a lot of other, related laws will be needed. You could call this a “securities legal cluster.”

The legislative work will involve the following aspects: First, due to the special nature of rights protection in the securities field, the securities group litigation system and financial consumer rights protection laws need to be clear on this subject; second, because securities companies may issue securities without prior authorization, the Macau Criminal Code needs to be specific about what constitutes a crime, such as stock manipulation, insider trading, and front-running (trading ahead of sensitive information being released); third a special securities supervision and management institution needs to be established, with a statutory independent legal status.

A Macau Stock Exchange should follow the international trend and incorporate so that it can be publicly listed itself. Yet it will also still need to prioritize the public interest. This needs to be clearly established in the Macau Commercial Code, including how to govern issues such as capital expenditures, dividends, and corporate governance. These need to be stricter, of course, than for a regular company.

The founding shareholders of the Macau Stock Exchange should be diversified. It is recommended to invite investment and development funds or other funds established by the Macau SAR Government, high-quality local non-gaming companies, such as China (Macau) Financial Assets Trading, and high-quality securities companies from the mainland, such as China Securities Depository and Clearing as sponsors.

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