Hong Kong exchange eyes new role to keep its edge over rival bourses
HKEX Chairman Chow Chung-kong is eager to see market expansion and the exchange expand its roles.
Chow Chung-kong, chairman of Hong Kong Exchanges & Clearing Ltd (HKEX) since 2012, loves history.
Reading books about history how he likes to relax, he said, despite his formal training in chemical engineering in the US, and a relentless focus on Hong Kong’s business future. Chow, born and raised in Hong Kong, has spent the past 25 years working in senior roles in the US, the UK, Japan and Australia, in a wide range of sectors. He said that this broad experience in business makes him suited to run HKEX, despite the lack of prior experience in banking.
Among those experiences was an eight-year run as chief executive of the MTR Corp, starting in 2003. In 2007, Chow led the MTR’s merger with the 100-year old Kowloon-Canton Railway Corporation. The love of the big M&A play found its way into Chow’s chairmanship of the exchange almost immediately. Just two months after joining HKEX, he led the bourse on its first overseas takeover to buy the London Metal Exchange (LME), the world’s largest base metals exchange, for HK$16.94 billion. Then, there was the launch of the two stock connect schemes with Shanghai and Shenzhen.
Diversification through acquisition is a tenant of his business philosophy. “A merger, if you can handle it properly, is a useful tool for business success,” he said in an interview with The Peak magazine, published by the South China Morning Post.
The LME is over 135 years old and it has the systems and platform to set the price and standard of commodities trading and the global warehousing to do physical delivery. “Buying the LME is a short cut for the HKEX to expand into commodities, which is important to bring in new revenue to the exchange,” Chow argues.
Asked about the changes in Hong Kong over the past 20 years, Chow remarks on the rapid growth of business, thanks largely to China. “The securities market in Hong Kong and the HKEX has gone a long way in the past twenty years and it is growing much faster than other sectors and is better than expected.” Total market capitalisation has risen eight-fold to HK$27 trillion, up from HK$3 trillion in 1997.
The financial industry represents 18 per cent of GDP of Hong Kong, up from about 10.4 per cent in 1997. The average daily turnover now stands at HK$82.1 billion, up from HK$15.5 billion in 1997.
But it is the IPO market that drives it all. Hong Kong ranked number one in IPO funds raised from 2009 to 2011, and in 2015-2016.
The challenge is attracting more new economy (tech) companies to list here as Chow says that many IPOs in Hong Kong are from traditional industries. On June 16, the HKEX issued a consultation paper regarding a proposal to set up a new third board with flexible regulation to attract start-ups and those firms using dual shareholding structures, such as Google or Facebook. The proposed third board, if supported by the market, will be launched in 2018.
Chow says the bourse is doing everything it can to win mega IPOs, such as the Saudi Aramco listing, expected to be the world’s biggest, next year. Since the LME acquisition, the commodity business is another area of expansion for Chow, who says that commodities income is now 14 per cent of total income for HKEX (there was none before the takeover). Income from stocks now represents 24 per cent, down from 56 per cent in 2000, when the HKEX was set up by merger the stock and futures exchanges and their related clearing houses.
The exchange has launched six metal products in Hong Kong and plans for adding two gold contracts in July while it is in the process of launching a commodities platform in Qianhai.
“It is not easy to expand into the commodities market. However, since mainland China is the largest consumer of many commodities, the room for future growth in this area would be huge. This will be a major development for the HKEX in [the] future,” Chow said. “The HKEX needs to diversify more in commodities trading, clearing and other new business lines. Like any other commercial company, HKEX will be successful only if it can keep on seeking new business lines and new income.”
Chow is keen to see political stability return to Hong Kong, believing that political extremism only hurts the confidence of mainland Chinese and foreign investors in Hong Kong. The concern about Chinese sentiment is understandable, considering China’s capital market opening has been the key to success for HKEX since 1997. Among the HK$3.269 trillion raised from new listings over the past twenty years, 78 per cent of those listings were mainland Chinese firms. This role will continue as Chow believes the Belt and Road Initiative, China’s vast plan for infrastructure investment across Asia, will boost listings in HKEX amid higher fund raising needs.
Another role Chow sees for HKEX is that of wealth management centre for mainland Chinese investors. China is a growing market for wealth management, owing to its rapid development. The stock connects mean that Chinese investors can buy Hong Kong stocks, and a bond connect is expected this year. “There will be more products launches at the HKEX to fulfill the role as a wealth management centre for mainlanders,” says Chow.
Chow offers a nuanced view on the nature of regulation for Hong Kong’s stock exchange. The HKEX is itself a listed company, and commentators have therefore called for the HKEX to give up its front line regulatory role, believing there to be a conflict of interest. The HKEX wants to have as many listings as possible to help boost earnings, but the idea goes that it conflicts with the requirement of the HKEX to maintain high listing standards.
Chow sees no need to change the current model, citing the success of the Hong Kong Exchange thus far. “We have an active IPO markets and we have active turnover. This shows the current system works well,” Chow says. In fact, Chow reckons that having to serve the public interest while listening to listed companies is a virtue, giving the HKEX the ability to “launch services and products that the market needs.” Chow highlights the importance of good communication with the SFC. “It is also important to achieve a good balance of regulation and market development.” Most recently, HKEX beat quarterly earnings expectations quite handily.
Asked about the future development of Hong Kong, Chow resorts to a quote from Charles Darwin: It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is the most adaptable to change.
(This an article that appears in the July/August issue of The Peak magazine, available now at selected bookstores and by invitation.)