HKEx in JV talks with Shanghai, Shenzhen exchanges

The Hong Kong stock exchange (HKEx) said it was in talks with its peers in Shanghai and Shenzhen to set up a joint venture for equity derivatives and index compilations, a move that would represent the first concrete link between three exchanges focused on China’s vast economy.The move by Hong Kong Exchanges and Clearing Ltd, the world’s most-valuable exchange operator, foreshadows deeper ties to come in the future and comes a day after China’s Vice Premier Li Keqiang announced measures to further liberalise cross-border investments between Hong Kong and China.HKEx may also help develop China’s equities derivatives market, said BNP Paribas analyst Dominic Chan, following on Wednesday’s announcement that exchange-traded funds (ETF) linked to Hong Kong stocks would be launched in China.“I think the key is that the derivatives market is still in its infancy in China,” Chan said. “Shanghai and Shenzhen need help developing that market and that’s where the Hong Kong exchange steps in.”Hong Kong, Shanghai and Shenzhen recorded total IPO proceeds of over $44 billion so far this year when added together, according to Thomson Reuters data, with the former British colony attracting international names such as Prada, Samsonite and Glencore.By comparison, New York clocked in at $26 billion so far this year, while London has raised $13 billion during the same time. News of the talks helped boost HKEx shares by more than 6 per cent in morning trade on Thursday as investors bet the deal would lift trading income. By comparison, the benchmark Hang Seng Index was flat at 0316 GMT. Cooperation between HKEx and its mainland peers has so far been limited by China’s closed capital account, but a slew of measures to further liberalise use of the yuan could change that. HKEx stood on the sidelines as a wave of mergers engulfed global exchanges at the start of the year, saying it preferred to focus on its Greater China operations. Tough regulatory regimes, cumbersome ownership structures and protectionist governments further complicate M&A activity.The Shanghai and Shenzhen exchanges are not takeover options because they are owned by a coalition of exchange partners and any change to its ownership structure must be agreed upon by all involved.The tie-up with the two mainland exchanges is also in line with previous HKEx announcements that it is open to strategic alliances, but has no plans for an outright merger.“I think it’s expected, this idea of cooperating with the Shanghai and Shenzhen stock exchanges to have more products,” said CCB International analyst Kenneth Yue. Analysts from Macquarie Securities and BNP Paribas said it was too early to say that the closer cooperation could eventually lead to a merger, given that the three exchanges were at different stages of development.“A full-blown merger between the exchanges is a bit far-fetched, but in terms of investment flows, it’s going to be very good,” said Isamel Pili, head of Asia financials research at Macquarie in Hong Kong.HKEx Chairman Ronald Arculli also alluded to the difficulty it faced in dealing with potential mergers, saying in March that investors were unlikely to dump hefty valuations on Shenzhen’s Nasdaq-style technology board in favour of Hong Kong. From / Gulf Today