Chinese bid for Chicago exchange hits roadblock as Beijing tightens capital controls

New stricter capital controls from Beijing and opposition from within the US weigh on the deal

PUBLISHED : Tuesday, 29 November, 2016, 8:48pm
UPDATED : Tuesday, 29 November, 2016, 11:27pm

A bid led by private Chinese company Chongqing Casin Enterprise Group to take a 49.5 per cent stake in the parent of the Chicago Stock Exchange (CHX) is now unlikely to go ahead given stricter capital controls implemented by Beijing and existing strong opposition from US lawmakers, analysts said.

Chinese investors would own 49.5 per cent of the bourse after the proposed purchase, while the combined voting power of two key investors will be limited to 20 per cent, according to a filing posted on the CHX website on Monday.

The deal comes at an uneasy time as Beijing moves to tighten capital controls to curb the scale of overseas investments in order to cushion the sharp depreciation of the yuan.

Starting Monday, all overseas payments under the capital account made through commercial banks in Shanghai that exceed US$5 million have to be submitted to Beijing for special clearance before proceeding, banking sources told the Post.

“My guess is it will be very difficult for them to get approval. The Chinese government is cracking down on capital outflow... particularly on companies that are buying assets offshore that are not in their core areas of expertise,” said Shaun Rein, managing director of China Market Research.

“Too many real estate and other firms are buying assets that they know nothing about and clearly this is viewed as a way to transfer yuan out and evade capital controls,” he added.

Zheng Zhigang, professor of finance with Renmin University of China in Beijing, said; “Taking up a US stock exchange is in accordance with the national strategy that encourages companies to go global, but controversially, it is indeed capital outflow...furthermore, the bourse business is not related to the core business of the acquirer.”

There is good cash flow and if the equity markets do better then there is a lot of money to be made
Shaun Rein, China Market Research

Chongqing Casin Enterprise Group is a privately held holding company, based in Chongqing, with investments in real estate, environmental protection and financial firms. It controls Shenzhen listed Casin Guoxing Property Development Co Ltd.

According to the CHX filing, Jay Lu, a US citizen and his father, Shengju Lu, Chongqing Caisin’s majority shareholder, would see their combined voting power limited to 20 per cent of the exchange owners’ shares, according to exchange ownership limits, even though they would jointly own 39.5 per cent of the holding company.

The investor group, including several other Chinese companies, and individuals and companies in the US, would own 100 per cent of the outstanding stock of CHX after the transaction.

However, special rules regarding the makeup of the board of directors of a self-regulatory organisation will apply to the CHX. These rules “specify that a majority of the board must be made up of directors that are not from the securities industry and do not own or otherwise have a material relationship with the exchange”, the filing said.

Analysts said the updated information about the deal was meant to ease concerns raised by US lawmakers in February when the planned sale was announced, about Chinese companies taking control of the US bourse and gaining access to confidential information.

“The Chinese have been looking to buy into the Chicago bourse for quite a while now,” said Rein. “There is good cash flow and if the equity markets do better then there is a lot of money to be made. But a lot of lawmakers in the United States complain about a stock change being owned by the Chinese and worry over it being owned by companies or parties related to the Chinese government.”

The purchase price of the deal remains unknown.

The takeover requires approval by the US Securities and Exchange Commission and the Chicago exchange has voluntarily submitted the case for review by the Committee on Foreign Investment in the US, an inter-agency authority which has the power to block any deals that jeopardises US national security.

If the bid succeeds, it would mark the first time Chinese-led companies have taken over a US bourse.