A New Confidence in Hong Kong

The city’s exchange looks to increase collaboration in Shanghai.


Hong kong authorities have dubious record of stock market intervention. Regulators shut the market for four days after the global stock market crash in October 1987, a move that drew sharp criticism from investors and failed to avert steep losses. A decade ago, during the worst turbulence of the Asian financial crisis, they imposed tight restrictions on short-selling in an effort to bolster the stock market and again met with little success. In recent months, however, Hong Kong has declined to curb short-selling — in stark contrast to the U.S. and Europe, where regulators imposed temporary bans. The hands-off stance demonstrates a newfound confidence in the local market.

“The most important thing is, you don’t change the rules during these circumstances,” says Paul Chow, chief executive of Hong Kong Exchanges and Clearing. “Investors should have certainty. The rules are there. They have been devised after years of market consultations.”

Chow has good reason to be upbeat. Although the global market meltdown has hit Hong Kong — the Hang Seng index was down 49 percent for the year, at 14,184 in late December — the exchange has remained open to companies seeking to raise capital. Twenty-seven companies made initial public offerings on the Hong Kong exchange in 2008, taking in $12.1 billion, making it the second-most-active market, behind New York, according to data provider Dealogic. Although Hong Kong’s IPO volume was down 71.5 percent from the record achieved in 2007, the exchange handily beat its Chinese rivals. Three IPOs raised $8.5 billion on the Shanghai Stock Exchange in 2008 and 72 brought in $4.4 billion on the Shenzhen Stock Exchange. Chinese companies accounted for 16 of Hong Kong’s IPOs and raised $5.5 billion.

Two years ago Hong Kong sought to avoid head-on competition with Shanghai by focusing on winning listings from private Chinese companies rather than big state-owned enterprises and by wooing regional businesses that have large operations in China. More recently, Chow is emphasizing collaboration with his mainland rival. With 50 Chinese companies now holding listings on both exchanges, Hong Kong and Shanghai are harmonizing regulations. The two exchanges signed an accord in October to distribute each other’s real-time data, beginning in January, and to explore the cross-training of staff and joint development of new products.

Chow thinks Hong Kong has more to gain than lose from Shanghai’s success. “As long as we do our job well, why should we worry?” he says. “Should we be concerned that the market is getting bigger and bigger? It’s a good thing.”

But Hong Kong faces challenges closer to home. In the past five years, at least a half dozen private competitors have set up so-called dark pools to allow investors to trade off-exchange at low cost and with limited market impact. Instinet, which offers a continuous block crossing service, has seen its volume grow to about 1.5 percent of all shares traded in Hong Kong in the past two years, according to Nicolas McDonald, the firm’s Singapore-based head of Asian equities. “More and more of these alternative trading venues will pop up, and they’re probably here to stay,” says Khaleel Mohideen, head of advanced execution products for Asia ex-Japan at Credit Suisse, which operates the CrossFinder dark pool service.

Hong Kong Exchanges has no plans to set up its own dark pool, but the company has invested more than HK$250 million ($32 million) in the past two years to upgrade its technology, increasing its data dissemination rate from 300 to 500 stocks per second in August and quadrupling the bandwidth of its derivatives trading platform in September. “Competition is always the name of the game,” says Chow.

Such spending contributed to a 26.3 percent jump in costs in the first nine months of 2008, outstripping a 6.4 percent rise in revenues; as a result, HKEx’s net income dipped by 2 percent, to HK$3.9 billion.

Still, observers give Chow credit for his work since taking over as CEO in 2003. “Overall, Paul has done a good job,” says David Webb, an advocate for the rights of minority shareholders and a former board member of the exchange operator. “He scores well for managing the business and his team in a fast-changing environment.”