HKEx to use LME deal as springboard for China growth
The proposed £1.4 billion takeover of the London Metal Exchange (LME) by Hong Kong Exchanges & Clearing (HKEx) is about diversification beyond cash and equity derivatives and forms a core part of HKEx's RMB strategy, according to the Asian bourse.
While some in London have expressed
concern about Beijing’s influence via the Hong Kong government’s appointment of
some of HKEx directors, others have suggested a lack of pull in the Mainland
may hamper its expansion into the lucrative Chinese commodities market.
Following last Friday’s official
announcement of the bid, approval must now come from 75% of shares cast at an
extraordinary meeting next month. The shareholders, including J.P. Morgan and
Goldman Sachs, of one of the world’s last major member-owned exchanges, are
expected to vote in favour of the takeover, which will land them a considerable
windfall as the deal values LME at more than 120 times annual operating profit.
HKEx has also agreed not to alter the
business model of the London commodities exchange until 2015, virtually guaranteeing
profits for the current members, who are also traders on LME. After that, HKEx
is expected to raise what are regarded as the low fees currently charged to
“The agreement fits extremely well with HKEx’s strategy to diversify
and expand outside its core cash equity and equity derivatives markets into
fixed income, currency and commodity products. The expansion into commodities
trading is part of HKEx’s ‘chapter three’ strategy that has been well signalled
to the market,” an HKEx spokesperson told theTRADEnews.com.
growth of offshore RMB in Hong Kong and the continued establishment of a
presence in Hong Kong by Mainland Chinese financial firms and corporates are
significant drivers of this strategy. China’s continuing growth and
internationalisation present HKEx with significant opportunities.”
HKEx is looking to cash in on the strong growth in metals trading
volumes, which rose 22% in 2011 and are up 18% so far this year, as well as
providing, “a level of counter-cyclicality vis-a-vis the core cash equities
Access to the Chinese market, including opportunities for data
distribution, Mainland market participants, RMB products and warehousing
possibilities, are also priorities, according to HKEx, which is also looking at
the possibility of “using the LME platform to grow into other commodities
HKEx said it intends to, “strengthen and enhance the LME’s
existing operations through implementing self-clearing to create a vertically
integrated exchange and by leveraging HKEx’s considerable IT expertise,
infrastructure and resources to enhance the LME’s current IT platform.”
Following more than a year of market analysis beginning in early
2011, the bourse determined that it would be challenging for HKEx to develop a
commodities business organically.
“The LME’s decision to put itself up for auction late last year
presented a once-in-a-lifetime opportunity to acquire a leading commodities
franchise,” added HKEx.
As for concern about Beijing’s influence, the bourse maintains, “China does
not own HKEx or have management control. HKEx has embarked on this transaction
for its own sound commercial reasons and in the interests of all of its
shareholders. HKEx is a publicly listed company with a wide base of
institutional and retail shareholders which is run with scrupulously high
levels of corporate governance.”
The bourse pointed out that there are also various legal and
institutional safeguards such as Hong Kong’s Basic Law, which is based on the
principle of one country, two systems, i.e. one country: China; two systems:
Hong Kong and the Mainland and that Hong Kong has its own independent legal and
regulatory system based on English Common Law.
Whether HKEx is overpaying for LME, and whether it can
successfully leverage access to the crucial Chinese commodities market, appears
to be concerning investors. Its share price fell from a Friday close of
HK$112.4 to a low of HK$106.30 on Tuesday, before recovering to HK$109.40 on Wednesday.