Less than a year after its pursuit of the London Stock Exchange Group ended in humiliating failure, the Hong Kong stock exchange is back on the front foot.
Shares in Hong Kong Exchanges & Clearing have surged almost 40 per cent to a record this year as the Asian bourse shapes up to be one of the few winners from escalating tensions between the US and China.
Faced with increasing hostility from Washington, a number of blue-chip Chinese companies that originally floated on Wall Street, including internet groups NetEase and JD.com, have raised billions of dollars in secondary listings in Hong Kong.
The decision by the high-profile Chinese companies to take out an insurance policy against a further deterioration in relations between the two superpowers is proving a boon for HKEX, helping to take some of the sting from its unsuccessful £32bn bid for the LSE last October.
The wind in HKEX’s sails is not simply coming from Washington. Even as China imposed a controversial national security law on Hong Kong, the bourse recently wrestled a lucrative futures contract, awarded by index provider MSCI, from its local rival SGX, Singapore’s stock exchange.
“It’s not an easy time for Hong Kong full stop but of the Hong Kong institutions, HKEX is one of those that is doing relatively well on the back of Chinese listings, and has even snatched a bit of business away from [Singapore],” said Hugh Young, head of Asia at Standard Life Aberdeen, a top 10 shareholder in HKEX.
But as HKEX’s market capitalisation hits HK$440bn (US$56.9bn), not everyone is convinced geopolitics will continue to run in its favour.
Although the delicate political balance appears to leave HKEX as the best means for global investors to secure exposure to the Chinese economy, that could shift if Beijing’s increasing encroachment into Hong Kong inflicts permanent damage on the territory’s status as a financial centre.
“US-listed Chinese companies are returning to Hong Kong for non-economic reasons and because they prefer Hong Kong to a mainland [China] listing,” said Brock Silvers, Hong Kong-based chief investment officer at Adamas Asset Management.
That “may do little to assuage longer-term investor concerns” given Hong Kong is caught in the political crosshairs, he added.
Worries also exist that Donald Trump, US president, could eventually try to directly target Chinese companies listed in Hong Kong. In May, he ordered the main US federal pension fund, the Federal Retirement Thrift Investment Board, not to invest in Chinese companies.
In the short-term, however, analysts say HKEX can expect more Chinese companies to seek secondary listings as they loosen their dependence on Wall Street.
NetEase and JD.com, which together raised more than $7bn in secondary listings, could soon be joined by Baidu, another Chinese tech giant, and Yum China, which operates KFC and Pizza Hut restaurants in the world’s second-biggest economy.
Companies raised $33.4bn through initial public offerings and other equity sales in Hong Kong in the first six months of the year, according to Dealogic data, up 70 per cent from the same period in 2019.
In May, the Senate passed a bill that could force Chinese companies from US exchanges if they do not comply with US accounting standards. China Renaissance, an investment bank, has estimated that about $1tn worth of Chinese listings on Wall Street could be ensnared by the legislation.
Charles Li, who has run HKEX for more than a decade but has announced plans to leave next year, recently said Hong Kong would benefit from a “less friendly” Washington.
“The trend is going to continue,” Christina Bao, head of global issuer services at HKEX, said of Chinese companies seeking secondary listings in the territory. Chinese companies listed in Hong Kong, whose ranks include Alibaba and Meituan Dianping, account for a large chunk of daily trading volumes, she said.
Charles Li, HKEX chief executive, recently said Hong Kong would benefit from a ‘less friendly’ Washington © Bloomberg
It is a view echoed by UBS analysts Kevin Chu and Sam Tang, who noted that HKEX could emerge “as the primary channel [for investors] to access Chinese new economy companies”. Such a shift would come at the expense of the New York Stock Exchange and Nasdaq.
But the growing number of Chinese companies cooling on Wall Street does not fully explain investors’ enthusiasm for HKEX.
Like its handful of major global rivals, HKEX has been in a sweet spot for much of the last decade as exchanges have found a way to profit from the dominant trends in capital markets, including passive investing.
Analysts say MSCI’s decision to award HKEX a derivatives licensing agreement long held by SGX was an important victory in the battle for regional dominance. The deal will allow HKEX to offer futures and options contracts based on 37 MSCI equity indices, mostly in Asia.
Roger Xie, an independent analyst who publishes on the SmartKarma platform, said the win could “redefine” HKEX as the region’s top derivative exchange, lifting its trading volumes of these products by up to 30 per cent.
HKEX has also been pushing for the rollout of futures based on mainland China’s onshore stock market, which Morgan Stanley analysts estimate could add up to HK$3bn to HKEX’s revenues.
That depends on securing regulatory approval from Chinese regulators. Last month, the China Securities Regulatory Commission’s vice-chairman Fang Xinghai indicated Beijing would support such a move, but no launch data has been announced.
“China is too big to ignore,” for investors despite the political turmoil, said Andy Nybo, managing director of Burton-Taylor International Consulting in New York.
When MSCI awarded HKEX the contract, Henry Fernandez, the chief executive of the index provider, insisted “Hong Kong is and will continue to be a major international financial centre.”
The territory’s ability to maintain that status will ultimately depend on Beijing and define HKEX’s long-term fortunes, say analysts.
Although memories of the LSE rejection maybe fading, the plan, fronted by Mr Li, was an ambitious attempt to carve out a future for the exchange as a link between Chinese companies and global investors hungry to invest in them.
It was sunk, in part, by concern that the Hong Kong government, which answers directly to Beijing, has the ability to pick six of HKEX’s board members.
Mr Young of Aberdeen Standard cautioned that the deepening political turmoil in Hong Kong “might make it harder” if HKEX chose to resurrect any plans for a global acquisition.
But whoever replaces Mr Li, the former oil-rigger from mainland China, will have their work cut out closer to home if the exchange is going to keep riding high.
Additional reporting by Hudson Lockett in Hong Kong and Philip Stafford in London