RECENT MONTHS have been eventful for bosses in Hong Kong, including Charles Li, the head of the island’s stock exchange. Days after a huge deal in his industry was announced in August—an agreement by the London Stock Exchange Group (LSE) to buy Refinitiv, a data provider, for $27bn—the Chinese People’s Liberation Army released a video showing troops quelling protests, a scenario that Mr Li had warned Beijing against. The protests continue, but Hong Kong Exchanges and Clearing (HKEX) is keeping calm and carrying on. On September 11th it made an audacious bid to scupper the Refinitiv-LSE deal and buy the British exchange for £31.6bn ($39bn) itself.
In normal times pundits might have hailed the proposal as visionary. Hong Kong is the world’s fourth-largest financial centre. Combined with London, it could rival New York. It is well positioned to benefit from the strength of Asian emerging markets. In its proposal HKEX dangled the prospect of Britain capturing growth as China’s currency, the yuan, internationalises—for example, with more Chinese firms listing in London.
And under Mr Li HKEX has proved an adept acquirer of foreign assets. In 2012 its bid to buy the London Metal Exchange for $2.2bn succeeded chiefly because of the promise of great things to be achieved in China. The acquisition has gone well. As other exchanges have done, HKEX has diversified beyond listings into trading services, derivatives and data. Its mix of fast-growing businesses adds up to far more than an opportunistic play on China.
But most of the LSE’s shareholders look likely to back the bourse’s prompt rebuff of HKEX. The board will examine the bid in detail, but called it “unsolicited, preliminary and highly conditional”. It reiterated its commitment to the Refinitiv transaction, which is due to be approved by shareholders by the end of the year.
The chief obstacle to the East-West tie-up is political risk. Cross-border exchange deals often founder on national sensitivities, as happened with the LSE’s own attempt in 2017 to merge with Deutsche Börse. HKSE’s proposal would mean a Chinese firm owning the main equity markets of Britain and Italy (the LSE bought Borsa Italiana in 2007) and key clearing infrastructure for European debt markets. British politicians and regulators, desperate to juice up the economy post-Brexit, might prove relaxed. American and continental European ones probably will not.
Mr Li is no patsy for China. Last summer he tussled with Beijing when the Shenzhen and Shanghai exchanges blocked mainland investors from buying shares in Hong Kong-listed firms with dual-class structures. That restriction harmed the IPO of Xiaomi, a telecoms giant. Nevertheless, six members of HKEX’s 12-strong board are appointed by Hong Kong’s government, notes an investment banker close to the LSE. It is an open question how independent of Beijing the territory’s government will remain. LSE shareholders are unlikely to see HKEX’s offered price, at a relatively low premium of 23%, as sufficient temptation to abandon the Refinitiv deal for one that has a serious risk of being blocked.
Backers of the agreement with Refinitiv, the owner of Eikon data terminals, are therefore confident. They note the market’s welcome for the LSE’s further expansion into data and analytics. The exchange’s shares had risen 20% from the date of that offer to just before HKEX’s bid.
The Refinitiv deal also faces regulatory hurdles, however. Like HKEX, the LSE swims in politically treacherous waters. China’s authoritarianism will have been one of the motives for the Hong Kong exchange’s London gambit. As for the LSE, the EU’s fears that post-Brexit London will be a freewheeling offshore centre could prompt its regulators to seek to limit the British exchange’s growth. The Refinitiv deal faces a gruelling competition review in Brussels over concentration of financial-data ownership. Mr Li’s bid to escape trouble at home may not succeed. But the Refinitiv deal is not home and dry either.