I. Self-innovation : Strategic Needs and Market Bottleneck

China's 11th Five-year Plan passed in March has explicitly pointed out the need to enhance self-innovation capability in order to foster development. It emphasises innovation capability as a core strategic issue for technological development, economic restructuring and transformation of developing mode. Measures in taxation, finance and public purchasing as well as accommodation in system design and market environment in support of self-innovation have also been raised. From Hong Kong's perspective, two major aspects are worthy of attention.

Firstly, such a strategy reflects China's immediate needs. Though having attained rapid growth and various progresses, economic development in China so far has demonstrated flaws due to its over-emphasis on speed. Apart from pressures on resources and the environment, the major issue is the lag-behind in technologies that were incommensurate with the level of economic development. This was manifested in the lack of self-owned brand names and techniques, reliance on foreign technologies as well as the focus of exports on low-end products, which is in stark contrast to China's third largest external trade volume in the world. In addition, the ratio of R&D expenditure to GDP in China was only 1.3%, still below the world's average. The lag-behind in innovation capability has already posed a threat to China's further development and deserves immediate attention.

Secondly, the immature capital market in the Mainland has hindered the progress of self-innovation. Overseas experience reveals that technological innovation requires both technology and capital. Technological innovation may produce high return, but at the same time involves high risks. Risk investments are thus indispensable, and these count heavily on the capital market. It is in this area that China still lags behind. China's stock market is far from maturity. It still takes time to resolve problems related to the quality of listed companies, investor maturity, regulatory standards, legal enforcement, etc. Besides, the stock market design mainly targets developed companies, not those recently set up or striving for growth. While speculators' role is crucial in providing liquidity, risk transfer and exit opportunities for initial investors in growth companies, it also takes time for China's stock market to improve in regulations so as to allow them to better play their role. All these weaknesses in the capital market have limited the progress in technological innovation in the Mainland.

II. Hong Kong's Potential Advantages and Opportunities

With a more mature and open capital market, Hong Kong should complement the Mainland's inadequacy. In practice, Hong Kong's GEM, which is designed to offer fund raising opportunities for growth companies as well as "high growth, high risk" options for investors, best fits the Mainland's need to promote self-innovation.

1. Challenges to the GEM

Since its inception in 1999, Hong Kong's GEM has not performed satisfactorily, no matter in market turnover, capitalisation or promotion of technological development. Transfer to the main board by major GEM members has further weakened the GEM's image. Hong Kong's relatively weak technology base and small manufacturing sector, together with the weakness of technology shares worldwide after the turn of the century and competition from overseas growth markets, have created an unfavourable environment for the GEM.

2. Hong Kong's overall advantage

Despite the above difficulties, Hong Kong's overall advantage, especially in comparison with the Mainland, should still support the GEM. Hong Kong's stock market is mature, as demonstrated in its efficiency, regulatory standards, diversified and mature investor base (particularly international investors), and market depth (as demonstrated in the listing of large state enterprises). Together with well developed business services, freedom of information and a sound legal system, Hong Kong should be an ideal place for self-innovation. The key to realise Hong Kong's advantage is to find ways to tackle its weakness in technology and innovation.

3. A New "China Concept"

The Mainland's need offers an opportunity for Hong Kong. Should Hong Kong's advantage and the Mainland's technological resources join force, Hong Kong's GEM can emerge as China's major growth market. This new opportunity actually reflects a new direction of China's economic development. At the same time, it indicates a new "China Concept" for Hong Kong. So far, the "China Concept" in Hong Kong has focused on natural resources and infrastructural activities, reflecting the emphasis of China's economic development. By now, China has come to a turn to rely more on technological innovation. Amid such a trend, should the GEM be able to grasp this chance and form a "Self-innovation Concept" of China, it would not only find its development path, but also emerge as a growth spot in Hong Kong's capital market.

III. The GEM's Positioning and Strategy

1. "China's High Technology Board"

Currently, the GEM's positioning can be summarised as follows. It serves growth companies, it focused on technological development and it targets Hong Kong and the Asian region. In practice, due to the relatively small domestic market and weak technology base, Hong Kong's GEM still needs to seek "growth" via the Mainland. Therefore, the GEM's can further define its objective as "China's High Technology Board", mainly serving the Mainland's need in technological innovation. China should have the economic potential to support a market similar to the U.S.'s Nasdaq and Hong Kong should be the first choice in the medium term. Positioning as China's high technology board should offer the best development prospects for the GEM. While serving the needs of the Mainland, it can also enhance Hong Kong's status in finance, or even development of new growth spots in some technology areas, contributing to Hong Kong's economic restructuring.

2. Market Mechanism

In order to attract technological innovation activities in the Mainland, it is time to review the GEM's rules, particularly the listing requirements, so as to make them more accommodating to growth companies. Quite a number of issues deserve attention, e.g. setting soft indicators about R&D capabilities, allowing more flexibility in business records, enhancing the efficiency of financing and refinancing activities that fits the timely nature of innovative activities, further strengthening the information disclosure and sponsors' system in order to boost investors' confidence, designing derivative products wherever suitable, exploring for cooperation with Mainland regulatory authorities, etc.

3. Take Advantage of Mainland's Policy

Practically, Hong Kong can proceed by choosing one or two major projects supported by the Central Government. Due to differences in administrative systems, the Mainland Government is more effective in implementing policies in favour of particular industries. Hong Kong needs to pay attention on this. For example, in the "Rundown to the State Science and Technology Long-term Development Plan", details about industrial policy, tax and financial arrangements of the state innovation strategy have been revealed. The Technology Bureau also has considerations to introduce capital, providing initial funds in particular areas. Hong Kong therefore needs to accelerate research efforts and promote the GEM in the Mainland. Should individual companies be successful in listing in Hong Kong, it would have strong demonstration effect, enhancing the confidence among the Central Government, enterprises as well as Hong Kong and international investors on the GEM. Further, once Hong Kong has established its status as China's growth market, enterprises from other regions can also be attracted.

4. Explore for Cooperation with Shenzhen

The establishment of the SME Board in Shenzhen in 2004 has also had an objective to promote innovation. As the role of the SME Board sounds duplicating that of Hong Kong's GEM, attention should be drawn to the relationship between both markets. At this stage, the SME Board is still far from maturity and Hong Kong can maintain its lead. In the long-term, the SME Board is also a major development target in the Mainland capital market, effort to explore for cooperation (e.g. One Board, Two Markets) with the Mainland authorities cannot be spared. Any constructive proposal from Hong Kong would certainly gain the Mainland's support of the GEM.

Above all, the new round of economic restructuring in the Mainland, with emphasis on technological innovation, offers Hong Kong an invaluable opportunity. It may confer Hong Kong's capital market with "new value" and offer us new opportunities. To attain desirable results, efforts and coordination among the government, the exchange and other parties, particularly in promoting the GEM to Mainland authorities, are deemed necessary. Currently, Hong Kong's economic upgrade through accommodating the Mainland's development has already become consensus. In actual practice, the GEM's development in support of the Central Government's innovation strategy should be a good attempt.