With almost every other major exchange announcing some form of merger or cooperation agreement, Hong Kong Exchanges and Clearing (HKEx) might look a little isolated to some, but Clare Rowsell, head of client relationship management, Asia-Pacific, ITG, believes it has time on its side.
Rowsell, co-author of a new report on exchange mergers from the agency broker and technology provider, ”Exchange Consolidation: The Next Wave', argues that macro-economic trends – such as the ongoing switch of investment flows from west to east – mean that Asian exchanges are looking to profit from growth opportunities. This stands in contrast with the priorities of exchange groups that derive the majority of their revenues from Europe and North America.
“Exchanges in Europe and the US are under pressure because volumes are fragmenting to alternative venues,” Rowsell told theTRADEnews.com. “Once Chi-X Global gets its licence to open for business in Australia it may add impetus to the ASX-SGX merger, but HKEx currently operates a monopoly and the Tokyo Stock Exchange (TSE) is not listed, so they don't face the same immediate pressures. Exchanges in Asia are in growth mode, whereas elsewhere they are on the defensive.”
Figures from HKEx's Cash Market Transaction Survey and the World Federation of Exchanges confirm both overall growth and increased demand from overseas investors.
In 2009/10, overseas investors contributed 46% of total market turnover in terms of value traded, up from 42% in 2008/09. Institutional investors accounted for 64% of total market turnover value (62% in 2008/09), remaining above 60% for the fifth consecutive year. Overseas institutional investors contributed 42% of total market turnover value, up from 38% in 2008/09. UK investors were the largest group of overseas investors in 2009/10, accounting for 29% of overseas investment in HKEx listed stocks, up from 23% in 2008/09. US investors contributed 24% of overseas investor trading in 2009/10, while investors from Mainland China accounted for 11%, down from 12% in 2008/09. Asian investors in aggregate contributed 27% of overseas investor trading in 2009/10, compared to 26% in 2008/09.
According to the World Federation of Exchanges, HKEx's was the world's tenth biggest stock exchange in 2010 in terms of value of share trading on its electronic order book, with US$1.496 trillion, a rise of 5.7% on 2009. Although on that measure it is still only the fifth largest exchange in Asia behind the TSE, the Korean exchange and its two mainland Chinese rivals, Shanghai and Shenzhen. By domestic equity market capitalisation, HKEx was the seventh biggest exchange globally at the end of 2010, at US$2.711 trillion (up 17.6% from 2009), but still behind both Tokyo and Shanghai.
Its position as the gateway to China has been HKEx's main engine for growth over the past decade and the three-year plan currently being implemented by CEO Charles Li is focused on competing with Shanghai and Shenzhen rather than bolstering the exchange against alternative trading systems. The exchange is already benefiting from Hong Kong's special status in the internationalisation of the renminbi and also intends to introduce renminbi-denominated products.
In September 2010, the announcement by the world's second largest mining firm, Vale of Brazil, that it intended to list in Hong Kong appeared to confirm HKEx's gateway status. But reports of an impending memorandum of understanding between BM&F Bovespa, Brazil's stock and derivatives exchange, and Shanghai, suggested a threat to this key strategic role. ITG's Rowsell, however, suggests that the fact that Hong Kong is both a Chinese exchange and a mature international financial market with an established infrastructure will stand it in good stead in the medium term.
“As the listing venue of choice for Chinese firms that wish to access international capital, HKEx is still in a very strong position,” she observes.
In the new ITG research report, Rowsell suggests that the timing of the recent concessions announced by the Singapore Exchange (SGX) in pursuit of its takeover of the Australian Securities Exchange (SGX) was far from fortuitous. Following hard on the heels of the London Stock Exchange's merger with TMX of Canada and Deutsche Boerse's intended combination with NYSE Euronext, SGX declared a new proposed governance structure for the merged SGX-ASX, consisting of equal numbers of Singaporean and Australian nationals and three international directors.
“SGX-ASX are making the most of the tailwinds from the other international exchange deals to strengthen their case with the regulators,” says Rowsell.
Although the deal has cleared its first hurdle with approval from the Australian Competition Commission, further steps include a review by the Foreign Investment Review Board, which must authorise a change to the existing 15% foreign ownership restriction. Moreover, the precarious position of the Australian minority government provides an unpredictable backdrop. As Rowsell concludes, “The deal still faces an uphill battle.”