HONG KONG (Reuters Breakingviews) - Charles Li is worried about the Hong Kong Exchanges and Clearing, but not very. Speaking at a Breakingviews Predictions event on Thursday, the stock exchange’s chief executive said he’s confident the HKEX’s – and by extension, the financial centre’s - awkward relationship with mainland markets will remain. “We are that magical gear [in the middle of] two big wheels,” he said – the wheels being China and foreign investors. A 23% rally in the company’s share price since September, despite an 8% fall in third-quarter earnings from a year ago, suggests investors agree.
The $45 billion bourse operator is in a tight spot. Political unrest has taken a wrecking ball to the economy, which is in recession, and hammered local outfits like MTR Corp, manager of the subway system, which has been repeatedly vandalised by demonstrators. HKEX itself may become a target of anti-Beijing sentiment if it permits Megvii, a Chinese surveillance technology company blacklisted by the U.S. government, to float. Li noted all companies are welcome to list, so long as they meet the criteria.
President Xi Jinping may be trying to hedge his dependence on the former British colony. He visited Macau recently, and there’s talk of turning the gambling hub – which like Hong Kong is outside of Chinese capital controls – into an alternative finance centre. There is also the standing threat from Shenzhen, which houses a $3.5 trillion rival stock market just across the border.
Yet Li is unintimidated. “Be my guest,” he said to Macau. “I don’t think we should be losing any sleep.” The cross-border trading connections he established – between Hong Kong and Shenzhen as well as Shanghai - are popular and robust. In contrast, the necrotic Shanghai-London scheme has been suspended after just one listing, according to Reuters in January. Moreover, despite violent protests, HKEX has kept floating big names like Anheuser-Busch InBev’s Asia unit and Alibaba, and the pipeline looks healthy enough.
Fundamentally Li is betting that China’s financial markets, distorted by excessive regulation, state-owned giants, capital account controls, and a volatile, retail-heavy investor base, will remain more or less the way they are. That means Hong Kong can endure as the only genuine international finance centre China Inc can rely on. A cynical bet, perhaps, but not an unreasonable one.
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