BY JENNIFER HUGHES
Most chief executives like to think big and Charles Li has been no exception. The outgoing boss of the Hong Kong Stock Exchange built a link with mainland China that handles large trading volumes every day and tried and failed to buy his London rival for $39 billion. That legacy and a spate of recent deals across the industry might tempt his replacement. It would be better to resist any such urges and focus on shoring up the company’s strengths.
In the decade under Li, Hong Kong Exchanges & Clearing solidified its position as a gateway to the People’s Republic. With a $63 billion market value in mid-December, it was jockeying with CME to be the world’s most valuable trading hub. Competition is rising for HKEX, however, as Shanghai and Shenzhen lure the sorts of startups that traditionally considered heading southward to sell their shares. The danger is that the next Tencent doesn’t reach Victoria Harbour.
Sizeable acquisitions will be tough and financially ill-advised for HKEX, though. Even as Nasdaq branches into regulatory technology with its $2.8 billion deal for Verafin and the London Stock Exchange aims to wrap up its $27 billion takeover of data provider Refinitiv, the Hong Kong bourse could be stymied from any similar M&A efforts because of its board’s close ties to Hong Kong’s Beijing-backed government.
A new chief would do well to devote energy and capital to fixing the outdated HKEX technology while also expanding further beyond equities into bond trading and derivatives. A focus on improving creaky systems, including the one that registers shares, and tackling its relatively high trading costs would carry significant expense. Its rival-beating 74% pre-tax profit margin will be squandered, however, if competitors woo more issuers and investors.
HKEX cannot escape its geography or the politics that cloud Hong Kong’s future. But those aspects are also what differentiate it from most of its peers. And the city’s position as a financial hub is riding to a large degree on the exchange’s success. The bold choice for the next CEO will be to resist the appeal of empire-building and instead doing what it does best, only better.
First published December 2020