Money Matters

London-Hong Kong Connect more marketing than reality

An MOU between a parent's wholly owned subsidiaries better described as a business plan

PUBLISHED : Friday, 23 October, 2015, 9:01pm
UPDATED : Saturday, 24 October, 2015, 2:00am

Whoever came up with the name "London-Hong Kong Connect" for a plan to give Hong Kong Futures Exchange members direct access to London Metal Exchange products is a marketing genius.

That is no less creative than selling a pair of worn out jeans at a major mark-up as vintage fashion.

The sexy title carries the ground-breaking flair of the Shanghai-Hong Kong Stock Connect.

Plus, with the signing of a memorandum of understanding between the two international exchanges, it becomes strategic and formal.

Put this on the list of Sino-British cooperation initiatives announced during President Xi Jinping's visit to the United Kingdom, and it starts to look real.

Yet, selling London Metal Exchange products in Hong Kong to lure mainland clients has been the justification for Hong Kong Exchanges and Clearing's decision to pay £1.39 billion (HK$17.31 billion) for the LME from day one.

In each HKEx presentation since 2012 there have been plans to lower trading barriers from Asia, develop Asia time zone clearing and price benchmarks, and build up yuan clearing.

The MOU signed is not one among independent regulators but between some wholly owned subsidiaries of HKEx. In the ordinary corporate world, it is called business plan not a memorandum of understanding.

The high-profile announcement of what some traders have described as "moves within expectation" under an eye catching title serves various purposes.

Adding to the list of Sino-British handshakes is politically clever. Describing it as supporting Beijing's "One Belt, One Road" campaign is even better.

Also, HKEx needs a new theme. The stock connect scheme can no longer carry the banner thanks to Beijing's rough intervention in the A-share market this summer and the depressing turnover ever since.

Mainland regulators are either busy meeting the graft busters or too paranoid about the risk of churning out new policies. It's been months since talk of the Shenzhen-Hong Kong Stock Connect and any signs of progress on mutual fund recognition.

While the equities business is sleeping, its chances of cashing in on the grandiose appetite for commodities up north looked dim as Beijing opposed LME operating warehouses on the mainland.

Last week, HKEx chief executive Charles Li told Reuters that the warehouse plan had been shelved "to maintain a good relationship with the mainland regulator" and "to focus on something even bigger". Within days, the London-Hong Kong Connect was announced.

That is a new talking point not just for investors but the auditor as well. At issue is whether impairment is needed for the US$13 billion goodwill caused by the daring price tag of LME.

Last year, trading volume on the London bourse grew by 3.5 per cent, less than half the rate seen in 2013 and the slowest growth since the financial crisis. Its pre-tax profit was down 6 per cent to HK$384 million.

With the mainland warehouse plan not going anywhere, management would need to show the auditor specific business plans to justify not making any write-down.

The question is how meaningful this London-Hong Kong Connect is.

Assume all the technical and regulatory issues can be fixed. The direct access to LME products in Hong Kong will bring in more retail investors rather than the professional investors who already have access.

This will not be meaningful unless Beijing allows its investors to play in the LME via Hong Kong.

That brings the whole thing back to the ultimate hurdles. First, the strong opposition from mainland commodities exchanges to the LME eating their pie.

Second, the central bank is very concerned with the currency implications of mainlanders actively trading LME products.

If these have blocked the warehouse plan, why would the plan to sell commodities products to mainlanders in Hong Kong be spared, whatever name one calls it?