The London Stock Exchange was wrong to reject Hong Kong’s US$36.6 billion offer. It needs to think bigger or risk being left behind

In rebuffing HKEX’s bid, the London Stock Exchange has failed to consider the role it could play as a funding centre for China’s belt and road. If Brexit happens and its position is diminished as a result, attitudes may well change

Anthony Rowley

Published: 1:00am, 16 Sep 2019

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The London Stock Exchange risks wishing itself into the wilderness with its hasty decision to reject a US$36.6 billion acquisition bid from the Hong Kong stock exchange.

Hong Kong Exchanges and Clearing’s offer gave London the opportunity to cement its position as a centre for financing China's massive Belt and Road Initiative. Instead, that position could now go to a European financial centre.

The LSE’s rejection came remarkably quickly, within days of HKEX’s surprise offer, and suggested politics had trumped economic, financial and logistical considerations. The rebuff was not unexpected, given recent political instability in Hong Kong and the view in London that HKEX is a Trojan horse from Beijing.

But HKEX has vowed to press on with its bid and is holding shareholders’ meetings. The LSE said in a statement on Friday that it “unanimously rejects the conditional proposal and, given its fundamental flaws, sees no merit in further engagement”. But attitudes are likely to change if Brexit goes ahead and London finds its role as a global financial centre diminished.

The LSE, along with British financial regulators, should have taken a leaf out of former New Zealand prime minister Robert Muldoon's book and learned to “think big”. They should have seen HKEX’s bid as a make-or-break opportunity for both London and Hong Kong.

HKEX’s offer was bold and farsighted when seen in the context of the Belt and Road Initiative, which aims to link Asia with Europe. As Kent Calder, director of the Reischauer Centre for East Asian Studies at Johns Hopkins, has noted, Hong Kong and London are natural funding centres for the Chinese trade strategy.

The City of London is a leading centre for offshore yuan trading and could further this advantage by creating a global platform for equity and bond issuance related to the belt and road plan. If Britain does not fill this role, others in Europe, such as Germany , probably will.

China bets everything on the belt and road

As Germany grapples with the threat of recession and Britain, its key trading partner, prepares to withdraw from the European Union, Berlin is likely to strengthen its economic cooperation with Beijing.

The bulk of the belt and road plan will need to be funded away from the Chinese government budget, either directly via equity and bond issuance in major capital markets, or indirectly via the issuance of debt securities by the China-led Asian Infrastructure Investment Bank and the state-owned Silk Road Fund. Capital demand will run into hundreds of billions of dollars.

This is where London should think big – in terms of its future role in financing real economy ventures such as infrastructure, instead of financial-sector-related ventures. Yet, according to the Financial Times, exchange operators are “increasingly shifting away from the core business of trading into supplying and monetising the data that is at the heart of markets”.

In this regard, the LSE has said it is committed to its own US$27 billion proposed acquisition of data and trading group Refinitiv, which would not be possible if it accepted HKEX’s offer. But HKEX has countered that the LSE could monetise data in China via Hong Kong.

For Hong Kong, the advantages of a tie-up with London were obvious. The move would help restore Hong Kong's credibility as a vital link with the outside world amid speculation that this role could be filled by Shanghai or Shenzhen.

Beijing’s non-Tiananmen response: build up Shenzhen, forget Hong Kong

Apart from political considerations, the British reaction to the bid has centred on the relatively low offer. But it is par for the course for a bidder to test the waters with an initial offer, then sweeten the deal as negotiations proceed.

A more intractable problem may be the fact that the bid is always going to be subject to British regulators’ intense scrutiny, given that, as the FT has put it, the LSE “owns trading venues and clearing houses that play a major role as the plumbing of global capital markets”.

This has echoes of the controversy over Chinese involvement in 5G cellular networks in Britain and elsewhere. But finding ways to more closely integrate China into global systems in areas from finance to communications is going to be essential as Europe and others come to terms with the fact that they are dealing with the world’s second-largest economy. Size does matter.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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