We recently unveiled our third three-year Strategic Plan since I’ve been at HKEX, and it’s our most ambitious yet. Our first plan aspired to go into commodities, and we bought the London Metal Exchange. Our second plan aspired to develop mutual market access and connect with Mainland China’s equity market, and we launched Shanghai-Hong Kong Stock Connect. Now we have a new plan for 2016 to 2018, and given our bold aspirations, people are asking me why we have such an ambitious agenda and how we can achieve it.
Our goal, as I explained previously, is to transform Hong Kong into a global financial centre that prices companies, prices goods, and prices money. Our new motto is “connecting China with the world, reshaping the global market landscape”. We can fulfill this pledge by connecting China with the world in three main asset classes: equities, commodities, and fixed income and currencies (FIC).
Everybody is familiar with our equities business, which is one of HKEX’s core strengths. We finished first in IPO funds raised again in 2015, the fourth time in seven years we’ve accomplished that, but there’s more to be done. The launch of Shanghai-Hong Kong Stock Connect has been a good first step, and we now intend to expand it and launch Shenzhen Connect. One of our key aims is also to launch a Primary Equity Connect, which would give investors in Mainland China and overseas the option of subscribing to primary offerings in Hong Kong and the Mainland, respectively, for the first time ever. This is feasible from a technical perspective, but important work remains for regulators to iron out the right regulatory framework.
The Primary Equity Connect is a key tenet of our strategy, because it would enhance Hong Kong’s position as a listing destination for large overseas companies. With the Primary Connect in place, US or European household names could list in Hong Kong and tap the hundreds of millions of investors in Mainland China in a familiar, international listing and regulatory regime that follows well-respected global standards.
But are we too focused on China? We are an international and open marketplace that is influenced by global economic trends as well as the Mainland’s economy. Even if we don’t connect with the Mainland, we will still be impacted by volatility in the A share market, just as New York and London have been. But if we do connect, we can reap the benefits of China’s continued economic growth and development.
The Primary Equity Connect would also not compete with Shanghai’s long-term plans for an International Board. It will likely take years for the Mainland to substantially restructure its legal and regulatory regime in order for large numbers of international companies to list on the A share market. The Primary Connect is the best way for the Mainland to leverage Hong Kong’s unique advantages to accelerate the pace for Mainland institutions and individual investors to internationalise their asset allocation while overseas investors would have access to A share issuances and placements, leading to a more diverse investor composition in the Mainland and a better pricing mechanism. The Primary Connect can be executed in ways to allow Mainland exchanges and intermediaries to partner with their Hong Kong counterparts in effecting primary offerings to achieve a win-win for both sides.
We also plan to expand our equity connect to the derivatives side. There are three ways to do this: through mutual market access (like Shanghai-Hong Kong Stock Connect), by cross-listing futures products, or by developing A share derivatives products in Hong Kong, a trusted market. The first and second options are difficult given the current conditions on the Mainland, so we are exploring how to realise the third option. By developing A share index derivatives, we will be meeting the needs of overseas and domestic investors to manage volatility risk and pave the way for international investors to go into the A share market. Investors are generally hesitant to increase their participation in a market if there is a lack of risk management tools.
The second major asset class is commodities. Our current commodities businesses are largely concentrated in London with the London Metal Exchange (LME), which we acquired in 2012. More than three quarters of global base metals trading, LME is supported by a global ecosystem deeply rooted in the physical markets and heavily supported by the world’s largest trading companies, banks and logistics providers. Futures contracts trade on LME-provided global price benchmarks in base metals. Compared with other commodities futures exchanges, participation by pure financial investors on LME is still relatively small. So a key part of our strategic plan is to build a London-Hong Kong Connect so that a much higher level of participation by Asia financial investors, particularly from China, can be secured over the coming years. This is what we mean by saying we want to “financialise” LME.
The most significant component of our commodities strategy is our plan to build an onshore commodities spot market in China starting with base metals. This is a bold and unconventional approach largely reflecting our views that (i) Hong Kong proper is not capable of supporting a substantial commodities trading hub due to its size, location and border controls; (ii) standard futures contract trading is strictly licensed and controlled in China; and (iii) substantial service gaps exist in China’s spot market infrastructure that HKEX is uniquely capable of filling, which could lay the foundation for HKEX to build into a leading commodities exchange that is deeply rooted in the physical markets just like LME.
Unlike the LME model, China’s domestic commodities futures markets are top-heavy, with commodities futures traded primarily by pure financial retail investors with limited physical settlement. As a result, daily trading volumes are multiples of open interest. Although physical users reference their prices, they rarely participate in trading as they cannot easily make or take physical delivery. At the same time, the physical spot markets are highly fragmented, warehouse systems are not trusted, credit enhancements are unavailable, and financing is difficult to obtain and highly expensive. Our plan is to leverage our experience in launching new initiatives with the Mainland to bring LME’s successful model there to create an effective spot trading platform, thereby “physicalising” the Mainland’s commodities market. In time, the platform could generate a series of truly globally-influential and representative “China price” benchmarks, and would provide a solid foundation for the sustained development of commodity futures trading either onshore or in Hong Kong.
Finally, our Strategic Plan talks about FIC. We will become an interest rate and exchange rate pricing hub built on the foundations of Bond Connect, another of our planned initiatives. Right now Mainland bond trading is mostly concentrated in the OTC market, so we want to help overseas investors participate in the domestic inter-bank bond market. We aim to cooperate with international platforms to allow Mainland investors to invest in a variety of international bonds, with trading and clearing done in Hong Kong. We believe that Bond Connect will attract investors and liquidity to support the future development of more interest rate and exchange rate derivatives.
We know these goals are ambitious, and they won’t be realised overnight. It’s going to take a long time (probably more than the three years) to accomplish everything. But we won’t get to the finish line unless we start the race. Once these initiatives are in place, Hong Kong will become more relevant to both the Chinese and international market users, and cement our position as a comprehensive financial centre across multiple asset classes.
I am pleased to say we have the plan in place, and we’re off to a good start.
Also, with the Lunar New Year just a few days away, I want to take this opportunity to wish all of you health, happiness, and prosperity in the coming Year of the Monkey!
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