The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
That was quick. Workers in Hong Kong’s finance industry returned to the office after a long weekend of violent protests to find that their stock exchange has decided not to pursue a takeover bid for its London counterpart.
The limp end to its month-long courtship has left Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., looking rather silly. One can’t help wondering if the exchange has any leadership, vision or ambition left.
The same can’t be said of London Stock Exchange Group Plc. By bidding for Refinitiv, the LSE is taking on a lot of risk. On completion of the deal, the exchange’s net-debt-to-Ebitda ratio would rise to 3.5 times, well above the 1 to 2 times range that its management deems comfortable. It will take the LSE more than two years to bring its debt level back down – and even that estimated time scale is seen as ambitious by analysts.
HKEX’s pursuit was half-hearted at best. With a squeaky-clean balance sheet, the company could have done a lot more. If it had been willing to bring its leverage ratio to the same level that LSE is tolerating, HKEX would have had more than $18 billion in cash to sweeten its offer. While LSE management was scathingly dismissive of the HKEX offer, many of its shareholders might well have been tempted – especially if the Hong Kong exchange had increased the cash component of its bid.
Local retail and institutional investors accounted for only 30% of HKEX trading last year, according to the exchange. Americans are the second-largest outside investors, after those from mainland China, accounting for 10% of Hong Kong’s total trading. The actual number is likely to be quite a bit higher, as US banks also trade Hong Kong stocks using their principal accounts. Billions of dollars will flee as US-China trade tensions escalate.
Those still brave enough to stick around may look to the mainland market instead. China’s announcement that it will remove quotas on buying Chinese stocks and bonds in September is a clear sign that Beijing is looking for an onshore alternative to Hong Kong.
At times of economic distress in the mainland, state-owned enterprises routinely perform national service, piling on debt to build roads to nowhere and provide employment. With almost half its board appointed by the Hong Kong administration and its chairman picked by the city’s chief executive, HKEX has the characteristics of a local government financing vehicle in China. So why is the exchange so timid in its drive to maintain Hong Kong’s relevance as a financial center? HKEX shareholders may be cheering after it dropped the LSE bid. Many finance workers won’t be.
—Bloomberg