MacroscopeHow the monopolistic Hong Kong stock market can turn its Achilles’ heel into an advantage

The monopolistic system in the city’s core market infrastructure has resulted in high transaction costs and post-trade inefficiencies

However, this very system could make Hong Kong’s exchange attractive to investors if it expanded post-trade capabilities and promoted direct exchange connectivity

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People walk through Exchange Square in Central, Hong Kong, on June 2. Introducing taxation on capital income or a higher salaries tax would undermine the city’s attractiveness as an international financial centre. Photo: Xiaomei Chen

Published: 8:15am, 7 Jun 2023

Tsingtao Brewery’s initial public offering 30 years ago marked the first mainland Chinese listing in Hong Kong and set the city on a path that would transform it from a small regional market to one of the world’s leading financial centres.

Three decades later, Hong Kong’s market has diversified very little, and remains heavily reliant on the listing and trading of mainland companies, which now account for close to 80 per cent of market capitalisation and almost 90 per cent of turnover.

Slower Chinese economic growth, geopolitical tensions, and Shanghai and Shenzhen’s growing competitiveness, therefore, pose serious challenges. However, Hong Kong must also contend with radical changes in the structure of global markets.

Low-cost, passive index funds have generated significant fee and cost pressures for asset managers and intermediaries across the investment value chain. Meanwhile, high-frequency and algorithmic trading strategies, which now account for the lion’s share of trading volumes, frequently trade across markets and asset classes. This means investors are increasingly focused on all-in returns, net of costs. This is where Hong Kong faces its most pressing challenge as a financial centre.

The monopolistic system in Hong Kong’s core market infrastructure has resulted in exchange trading fees that are among the world’s highest and, by some comparisons, multiples of those in other markets.

The absence of competitive pressures has also meant a persistent failure to invest in upgrading its post-trade platforms. The city’s clearing houses have very limited cross-margining capabilities and virtually no ability to offer margin netting across different product classes. This makes Hong Kong one of the least capital- and liquidity-efficient major markets in the world. As monetary policy normalises from the post-global financial crisis era, this is likely to prove a major drag on market liquidity.