Hong Kong stock exchange makes bid for London rival

Investors cheer move, but regulators wary of giving Beijing control of key stock exchange

The Hong Kong stock exchange wants to buy its London counterpart to create a $70-billion (U.S.) company, a bold move that faces big hurdles and will likely raise concerns in Britain about the Chinese government’s potential influence over one of the symbols of global capitalism.

The London Stock Exchange, a 300-year old institution that was at the heart of a British empire that included Hong Kong, said Wednesday it would consider the cash-and-shares offer that values it at £29.6 billion ($48 billion).

A deal would give it a lucrative foothold in Asia, a fast-growing region that could be attractive if Britain ends up leaving the European Union without a deal, a scenario that would see an array of trade barriers go up with its neighbours.

But while investors cheered the move, pushing shares in the LSE up 6 per cent, many experts remained skeptical, not least because the company has been subject to various failed deals in the past.

One aspect of the proposed deal that could give leaders at the London exchange and British regulators pause for thought is the fact that at least half the board, including the chair, of the Hong Kong Exchanges and Clearing Ltd. is nominated by the Hong Kong government, whose leader is ultimately appointed by China’s communist rulers.

“The proposed offer would be totemic in terms of East-West relations,” said Richard Hunter, head of markets at interactive investor. “The very nature of the Hong Kong approach will be subject to any number of considerations, such as competitive and regulatory issues.”

As a result, he said, it’s “far from a done deal.” Many Western governments are increasingly at odds with China over its state-led control of many companies and markets and regulators may be wary of giving Beijing indirect control of a key stock exchange like London’s.

The United States, a key U.K. ally, is in a wide-ranging campaign to stifle China’s rise to economic and technological pre-eminence, so this deal could raise political questions.

Then there is the fact that the London Stock Exchange already has vowed to tie up with London-based financial data provider Refinitiv for $27 billion. A deal with Hong Kong would be contingent on that deal being abandoned. Hong Kong exchange CEO Charles Li acknowledged the company was coming late with its offer, but hoped to win over the London firm in a “corporate Romeo and Juliet” story.

Refinitiv’s appeal is its data, viewed as a lucrative new business operation that would help the London exchange move on from being a simple trading platform. In Hong Kong’s favour is that a deal in Asia would give the London exchange, which also owns the Milan bourse and the Russell Indexes in the U.S., access to a new market whenever it leaves the EU. As things stand, Britain is due to leave the EU, which it has been a part of for 46 years and with which it has extensive and deep economic ties, on Oct. 31.

Britain’s pro-Brexit government has proclaimed its desire to turn to markets beyond Europe to shore up business and London’s role as a financial hub, so a deal in Asia for the London exchange could be viewed as an asset.