The Hong Kong stock exchange said Thursday it was setting up a joint venture with the Shanghai and Shenzhen exchanges as it seeks to boost economic integration.

Hong Kong Exchanges and Clearing (HKEx) said the venture will "enhance the competitiveness of Hong Kong, help promote the development of China's capital markets and the internationalisation of the three exchanges".

Each of the exchanges will make an initial investment of HK$100 million ($12 million) in the new company, which will develop index-linked equity derivatives products and compile cross-border indices based on products traded on the three markets.

Hong Kong finance secretary John Tsang said the venture will develop the competitiveness of the Mainland's capital market.

"The joint venture will enhance the internationalisation of the three exchanges," he said.

The announcement comes a day after Chinese state-run Xinhua news agency reported that the use of the yuan would be expanded in Hong Kong.

Earlier this month, the Hong Kong stock exchange bought the London Metal Exchange (LME) for a total of $2.15 billion claiming that the purchase would boost its role as the bridge between China and international markets.

Hong Kong retained its crown as the world's biggest IPO market for the third year in a row in 2011, thanks to a slew of companies that turned to the city in a bid to tap mainland China's explosive growth.

The city raised a total of US$260 billion from new listings last year, but the IPO market has been quiet so far this year.

Hong Kong facing 'unprecedented challenges'
Hong Kong (AFP) June 28, 2012 - Hong Kong is facing "unprecedented challenges" amid the global economic crisis, the city's finance chief said Thursday, as the leader-elect announced his new cabinet.

"In the coming few years, the economy of our globalised world will be undoubtedly clouded by uncertainties and volatilities," said John Tsang, 61, who was retained in his position by Leung Chun-ying.

"We in Hong Kong will face unprecedented challenges."

The former British colony, known for its laissez-faire economy, has struggled to deal with a widening wealth gap, while surging property prices have made housing unaffordable for many of the city's seven million people.

Tsang said Hong Kong will strive to boost economic growth -- which is forecasted at 1.0-3.0 percent this year, down from 5.0 percent in 2011.

"While recognising the advantages of a free market, one must also accept that it can at times fails to function properly," he said.

Tsang, who took over as the finance chief in 2007, said he wants to create a "healthy and stable" property market.

Prices have surged 95 percent over the past five years and Leung has promised to make it a priority.

Leung, who is set to take office on Sunday as Hong Kong marks the 15th anniversary of its handover to China, introduced his 15-member cabinet after the name list was endorsed by Beijing.

The cabinet includes five new faces while Carrie Lam, currently in charge of land, will be promoted to the post of chief secretary, the government's second most senior position.

Hong Kong retains a semi-autonomous status with its own legal and financial system under the "One Country Two Systems" model, with civil liberties not seen on the mainland.

Chinese President Hu Jintao is due to arrive on Friday for a three-day visit in time for the anniversary.