HKEx is under threat, but not from a Singapore-ASX deal
If you wade through the business media this week, the chances are that you will get the impression that Hong Kong is under attack - yet again.
This time the threat is supposed to come from a proposed US$8.3 billion merger between the Singapore stock exchange SGX and its Australian opposite number ASX.
Scores of reports have focused on how the two exchanges between them list 2,700 companies compared to Hong Kong's 1,200, and how the combined markets would boast a total market capitalisation of almost HK$15 trillion - not far behind the Hong Kong stock market's HK$18 trillion.
As a result dozens of commentators concluded that the proposed merger poses a dire threat to Hong Kong's livelihood. To a man they argued that an SGX-ASX tie-up would endanger Hong Kong Exchanges and Clearing's established status as the market of choice for Chinese companies looking to raise equity capital from international investors, as well as its emerging position as the favourite exchange for foreign resource companies in search of an Asian listing.
The latest figure to join in this chorus of breast-beating is none other than the chairman of HKEx, Ronald Arculli. In yesterday's South China Morning Post, Arculli was quoted complaining that the proposed merger would make it harder for the Hong Kong to attract listings from mining firms.
What utter drivel. Arculli may be right that the Hong Kong market faces a potential threat to its position, but it certainly isn't posed by any merger between the stock exchange operators of Singapore and Australia.
For one thing, the acquisition of ASX by SGX may never go through. The deal faces growing political opposition in Australia, although it would be a mistake to read too much into that. As one veteran of the Australian market said yesterday of the deal's political critics: 'A bigger collection of fruitcakes you just couldn't ask for.'
Even so, the regulatory hurdles remain formidable, and SGX shareholders will surely soon begin to question the steep price they are being asked to pay for their Australian purchase.
But even if the acquisition does proceed, it is unclear how or why the deal would pose a competitive threat to Hong Kong.
After all, what is being discussed is the purchase of one exchange operator by another, not a merger of the two stock markets. Each exchange would continue to function as a separate market, subject to its local regulations, listing stocks denominated in its national currency and with its own stand-alone clearing and settlement system.
As a result, it is hard to see why a merger between the exchanges' owners would make either exchange more attractive than it already is as a venue for international listings.
And that attractiveness is questionable. Consider the success of the two exchanges at winning listings from Chinese companies. ASX lists just a tiny handful of Chinese shares, although it recently attracted a A$70 million (HK$532 million) offering from a Chongqing-based coal miner which wanted to raise capital to fund acquisitions in Australia.
SGX has done better. At the end of September the Singapore exchange listed shares in 153 Chinese companies with a combined market capitalisation of S$38 billion or HK$227 billion, less than 5 per cent of the market's total.
But that's still small beer compared to HKEx, which at the end of last month listed 255 mainland stocks worth a thumping HK$9 trillion, or nearly half the market's total capitalisation.
An ASX-SGX merger will do nothing to change the picture. ASX may get listings from the odd Chinese mining company with designs on the Australian resource sector. And Singapore will go on attracting mainland minnows who like SGX for the rarity value they carry there. But the whales - the giant Chinese companies with international ambitions - will continue to list in Hong Kong, won over by the market's proven depth, convenience and quality.
Similarly, there is no obvious reason why the proposed SGX-ASX deal should derail Hong Kong's plans to draw listings from international commodity companies. Resource sector companies from around the world are interested in listing in Hong Kong because their customers are Chinese, and increasingly their customers are becoming shareholders too. With commodity companies in need of capital to fund expensive expansion plans to meet growing Chinese demand, managers are sensibly concluding that they should make buying shares as easy as possible for their most promising investors by seeking listings in Hong Kong. Neither Sydney nor Singapore can offer the same sort of access to Chinese capital, nor could they even if the two exchanges merged.
As a result, the proposed SGX-ASX merger poses little danger to Hong Kong. But that does not mean HKEx will face no competitive threats over the medium term. Part of the reason ASX was vulnerable to takeover in the first place was last year's regulatory changes in Australia which stripped the exchange of its monopoly as a stock trading platform, opening the market up to potential competition from new electronic order-matching systems which promise greater liquidity, faster execution and cheaper trading.
HKEx still enjoys a statutory monopoly, so similar platforms are largely blocked from offering their services in Hong Kong. But demand from big investors for faster more liquid trading platforms is growing. If HKEx doesn't respond, it faces the possibility that new listings may start to migrate to other markets where such services are available.
As Glenn Lesko, chief executive for the Asia-Pacific region at electronic brokerage company Instinet explains: 'If HKEx doesn't begin to service the participants who are bringing volume to the exchange, its position could be at risk.'
That's the threat Arculli should be worrying about, not the proposed SGX-ASX merger.