HKEX and LSE, A Capitalist’s Conundrum

Today’s bid by Hong Kong Exchanges & Clearing (HKEX) to buy the London Stock Exchange Group for $36.6 billion is a conundrum in what otherwise would be a continuation of global consolidation among exchanges. But it is muddied by the geopolitical backdrop that could make the London Stock Exchange off limits to certain suitors, especially those under the control of the Chinese government. 

Those who know HKEX’s CEO Charles Li will point to his resourcefulness and vision for his exchange’s future. The acquisition of the London Metal Exchange in July 2012 for $2.2 billion was considered a bold move for an exchange that was largely considered one of Asia’s big three markets. It turned HKEX into a multidimensional international market.

Li’s move to buy the LSE now looks like a similar attempt to outmaneuver the Chinese government’s capital markets grand plan to make the mainland a domestic and international securities and derivatives powerhouse. The timing is peculiar for this deal, in the midst of the largest civil unrest in Hong Kong’s modern history. The looming Chinese intervention in the efforts for more democratic freedoms cannot be understated here. 

And so Li is striking outward for greater diversification in his exchange portfolio in the off-chance that China eventually crushes what is essentially an international, capitalist zone in a broader Communist expansion. Li said, “This has nothing to do with Hong Kong’s situation,” in his conference call on the deal. But there’s no getting around the issue. 

Li’s efforts to navigate in these challenging waters is admirable. The Hong Kong-Shanghai Connect, connecting HKEX with the Shanghai Stock Exchange in 2014, was not only good business for HKEX but is a way to keep the exchange relevant in the decades ahead. For mainland China, it is a way to leverage the international expertise of Hong Kong while it gets its markets up to international standards.

The British government, now in tatters, must now consider whether or not the LSE is a national treasure in the manner that Canada protected TMX from the LSE in 2011, or the Australian government protected ASX from a merger with the Singapore Exchange in 2010. It is further complicated by Brexit, which will certainly devalue London’s status at the world’s top financial center. Moreover, the British government must decide whether an exchange, which falls under the oversight of the Chinese government, is considered a good thing for the UK. 

The US also has experience here on a much smaller scale when the government rejected an offer for the Chicago Stock Exchange by an investor group led by Chongqing Casin Enterprise Group in 2017. Members of Congress ordered the Securities & Exchange Commission to stop the sale, saying that regulators would be unable to monitor the foreign buyer’s activities and would grant access to the US financial system. At the time, it seemed to some to be provincial thinking. In retrospect, given the size and scope of China’s cyber strategy, it was prudent. 

While it would be easy to say such concerns are without merit in the HKEX bid, it is perhaps a bigger issue than the bidding price. 

Indeed, the stakes are high here for LSE and HKEX. The question now is, can a capitalist driven deal move forward given today’s political environment? LSE shareholders and the British government should think carefully about this one.