Can Hong Kong be friends with mainland exchanges?
Joint venture with Shanghai and Shenzhen bourses points to closer co-operation, but is unification of the trio possible, ask observers
The relationship between the Hong Kong stock exchange and its mainland counterparts entered a new chapter this week with a joint venture set up to boost co-operation. But there is a big question mark over whether the three can really become partners.
The landscape is changing rapidly. The Shanghai and Shenzhen exchanges will become shareholding companies and plan to list sooner or later. That will transform the whole industry, bringing them into competition more directly with Hong Kong Exchanges and Clearing.
The local market, meanwhile, is trying to expand its yuan- denominated shares and other products to compete with Shanghai.
But any hint of conflict between the three was downplayed at this week's launch ceremony of the bourses' joint venture, China Exchanges Services.
The HK$300 million project, which is equally owned by Hong Kong Exchanges and Clearing, Shanghai Stock Exchange and Shenzhen Stock Exchange, will be based in Hong Kong to develop index or equity derivative products as well as compile new indices that will allow investment banks to issue index fund products.
Speaking at the opening ceremony, the joint venture's chief executive, Bryan Chan Ping-keung, who is also the head of market data at HKEx, said: "The joint venture provides a platform for the three stock exchanges to co-operate and launch new products. This will allow the three exchanges to work together to create products for international investors to trade."
Any media events will involve senior executives of the three entities, and even the new business logo is a fluid circle to symbolise "endurance, vitality and unity".
The initial investment of HK$100 million by each partner is peanuts. But it is a significant symbolic move and behind the scenes there is political motivation.
The joint venture was announced a day after a visit to the HK exchange by Vice-Premier Li Keqiang in August last year. Brokers believe mainland leaders do not want to see the three markets in competition, but want them to work together to compete with overseas exchanges or newly developed trading platforms, such as dark-pool operators, who specialise in large institutional transactions.
Shanghai Stock Exchange president Zhang Yujun said in June that Hong Kong was chosen as the headquarters of the new venture as a sign of Beijing's support for the city. "As China continues to open up and the yuan gradually internationalises, it is inevitable we will have to compete in international capital markets," he said.
The rivalry between HKEx and Shanghai exchange is seen as a race between the two cities as they both seek to become global financial capitals.
The Shanghai city government, which is keen to build the city into a leading global financial centre by 2020, is determined to launch an international board next year to attract global initial public offerings such as HSBC or Coca-Cola, which will be in direct competition with Hong Kong.
Both the Hong Kong and Shanghai bourses have sought to attract listings by major mainland companies, while in recent years Shenzhen has joined the game by attracting smaller companies.
The Shanghai exchange is registered as a non-profit membership organisation but people close to the bourse say it has become perhaps more ambitious.
The Shanghai exchange has held several internal meetings this year to discuss the possibility of becoming a shareholding company, and some officials have even suggested that the exchange could prepare for a listing.
Such initiatives have won support in principle from Guo Shuqing, chairman of the mainland securities regulator, the China Securities Regulatory Commission.
The smaller Shenzhen market is also mulling becoming a shareholding company, paving the way for a listing in the near future, say the people close to the bourse.
If successful, the two bourses, particular the bigger Shanghai exchange, will become an increasing threat to not only Hong Kong, but also Singapore, as leaders in the region.
On the other hand, both mainland exchanges have their own agenda and want to compete with each other before they seek to challenge HKEx's leading role in Asia.
Some industry watchers say Beijing does not want to see Shanghai, Shenzhen and Hong Kong compete too aggressively as the CSRC believes they should work more together to compete with Western exchanges such as New York. This explains the birth of the three-way joint venture.
Brokers view the venture as a way to promote more cross-border co-operation, with some even speculating that it could be the very first step to a full merger.
HKEx chief executive Charles Li Xiaojia said in June "discussions among the three bourses have never touched on potential mergers".
However, with the proposed listing of the markets, brokers believe a merger or some form of shareholding swap for the three bourses would be a possible scenario.