Last week's annual Hong Kong Exchanges and Clearing media luncheon, hosted by Charles Li, demonstrated a certain amount of dexterity on the part of the CEO. In providing the assembled local and international press corps with an update on his 2010-2012 plan to ready HKEx for greater competition, Li emphasised not only the importance of the offshore renminbi but of renminbi-denominated commodities derivatives. Indeed, in mapping HKEx’s multi-asset future, he characterised commodities as the ”greatest” opportunity facing the exchange.
This raised fewer eyebrows last Thursday than if it had been mentioned when he first unveiled his three-year plan, or even 12 months ago, when the exchange was preparing for its first renminbi-denominated IPO. Even then, delays and down-sizing of other mainland-linked equity deals suggested that the window was closing fast. So convinced were exchange executives that the Hui Xian REIT would be followed up by similar offers that HKEx built a trading support facility (TSF) to ensure easy access to future renminbi-denominated for those trading members largely operating in Hong Kong dollars. Too late for the under-traded REIT, the TSF was operationally ready in October and goes live this month but may have to wait some yet to prove itself. By Q2, the euro-zone crisis had added to the list of incentives for issuers to stay on the sidelines. And while Li underlined HKEx's claims to being the world's number one IPO market in his lunchtime presentation - thanks to international 'marquee' listings such as Glencore, Prada and Samsonite in 2011 - there are few signs of a resurgence of renminbi-denominated equity issuance.
That may change after the lunar new year, especially now that Chinese regulators have widened the range of mainland firms that can list in Hong Kong and introduced a renminbi-denominated QFII regime. But Li has seen which way the wind is blowing and is taking no chances. If equities offers little scope right now to further cement HKEx's credentials as the premier provider of offshore renminbi-denominated instruments, it makes sense to look for other opportunities. External use of the renminbi for trade purposes had barely got off the ground when Li was originally putting his three-year plan together, but the subsequent exponential growth of the renminbi transactions and deposits - according to financial messaging network SWIFT it was the 17th most used currency for payments globally in November 2011 - is just one reason for Li to pursue his core aim by other means.
The legal and infrastructure challenges involved in establishing an international-standard bond market in mainland China and the continued restrictions on commodity derivatives trading by non-domestic market participants should guarantee ready demand for new HKEx product lines. With Chinese consumption and production of key commodities likely to continue to be a dominant trend of the next decade, Li is surely right to assert that the current disconnect between mainland and international commodities trading players cannot continue.
Moreover, the lack of success of the exchange's dollar- and sterling-denominated gold futures and the growth of the Hong Kong Mercantile Exchange should hardly prove insurmountable barriers to diversification to an exchange that still enjoys state-backed monopoly in its core business. Which is another reason why Li's more explicitly multi-asset approach has strategic appeal. HKEx's might have secured an exemption to the recent overhaul of Hong Kong's competition legislation, but Li is probably not counting on government protection lasting in perpetuity. Technology has exploited legal loopholes to provide irresistible competitive challenges to incumbent exchanges in other markets, first in western developed markets and increasingly now in Asia and emerging markets worldwide. The response of exchanges in Europe and the US to greater competition for equities volumes - diversification into other asset classes - is much the same as the strategy that Li appears to be adopting in Hong Kong. Given the subsequent media coverage, the exchange probably feels this year's press lunch was a success. But the CEO has the chance to reinforce his message on Thursday, when he takes part in the exchange's new year reopening ceremony.