HKEx chair talks lunch breaks, listings and leadership

Ronald Arculli was skiing in Austria while business leaders and government heads talked doom and gloom at the World Economic Forum in neighboring Switzerland.

The skiing is better in Austria, he jokes, when asked why he didn’t attend the annual Davos forum.

Perhaps as proof of this, heavy snowfall and blocked roads conspired to keep him away from the opening of trading at the Hong Kong Stock Exchange (HKEx) and the chairman would have missed the opening bell on the first day back after the lunar New Year break had it not been for a fortuitous one-hour clearing of the roads.

Safely back in Hong Kong, Arculli talked to IR magazine about the internationalization of the renminbi, the threat of dark pools and the prospect of more stock exchanges mergers in the Year of the Dragon.

But first the career lawyer, current chairman of the World Federation of Exchanges (WFE) and 30-year veteran of the board of the Hong Kong property developer and Hang Seng stalwart Hang Lung tackled the slightly less global but no less emotive issue of the HKEx’s shrinking lunch break.

Once a generous two hours long, then 90 minutes, the next cut, announced recently, will starve market participants to a mere lunch hour.

The move prompted street protests from a disgruntled mob of local stockbrokers, culminating in a signed letter being handed to Arculli and CEO Charles Li during an angry confrontation outside of the HKEx building in downtown Hong Kong.

What prompted the latest cuts to the beloved lunch break?

When you look at Hong Kong, we are obviously part of China, so to align opening hours with the mainland markets is a perfectly natural thing for us to do.

We also have the advantage of being an international market, so we need to cater to both the interests of mainland China and those of global investors.

We didn’t get to where we are by accident. Everyone works very hard to put Hong Kong and the HKEx where we are today, particularly the industry players.

But because of the uncertainties of the global economy, trading volumes have been average. Our total average turnover, both in 2010 and 2011, saw a couple of percent growth.

Basically, growth-wise, we were kind of flat. At the same time, you do see the international companies – from AIA to Prada, Vale, Rusal and L’Occitane – coming to Hong Kong so hopefully the brokerage companies see this as a positive development for the industry and the market, and embrace the changes we need to make to remain competitive.

China topped the global IPO league table in 2011. What is the 2012 IPO market looking like from HKEx’s point of view?

If you look at the past 10 years, Hong Kong has really been within the top five of the IPO fundraising exchanges. Indeed, we have been fortunate enough to be top three in the last three years.

But being top five in 10 years is more indicative of the depth of our IPO market. For 2012, we are cautiously optimistic because in part our economic situation is a little better than it is in the West.

There will be a number of other things going for the exchange, as well. For instance, in his speech at the recent Asian Financial Forum in mid-January, Yao Gang of the China Securities Regulatory Commission mentioned that the commission would be accelerating its approval procedure for mainland enterprises looking to list in Hong Kong. Those are very encouraging words.

In terms of activity for 2012, as at the end of December last year, we have 115 active listing applications, with 51 being approved and the remaining 64 still under process so, pipeline-wise, we are alright – touch wood.

What is the attraction of the likes of Hong Kong, Shenzhen and Shanghai, when many Asian exchanges lost more value than their equivalents in the US and even in troubled Europe?

The explanation is quite simple. Whether we like it or not, Asia is still an export-driven economy.

In 2009 the Asian exchanges increased far more than their western counterparts in the US and Europe, so we really had a higher base going into 2010 and 2011.

Be it mainland China or the rest of Asia, we still haven’t had time to replace the slackening off of exports by encouraging and driving up domestic consumption.

You can’t do that at the flick of a switch. The policies that exist now are heading in that direction, where the Asian governments are encouraging much more local consumption and trying to be less export-reliant, but it will take some time.

Is the encouragement of domestic consumption what attracts the likes of Prada to list in Hong Kong?

That is part of it. The other part is the availability of capital and the depth of our market in the last few years.

Take AIA for example. Nowhere in history has a single company raised more than $20.5 bn on a single exchange so that’s quite an achievement for HKEx.

Then the following day you might have a $100 mn issue, while about 500 of our nearly 1,500 listed issuers have a market cap of $130 mn or less. That’s a good spread of coverage and issuers.

HSBC makes regular noises about moving its headquarters to Hong Kong. It has gone quiet for now, but would this be a welcome move for the HKEx?

Clearly we would welcome that, but it is not a must-have. The way we look at it, HSBC probably has two headquarters today: one in London, one in Hong Kong, and if London was to move back to Hong Kong, it would obviously be a welcome move.

On the other hand, if HSBC decides to stay put, the separation really hasn’t affected the profitability of Hong Kong or Asia over the years.

Half of the market cap of the Hang Seng Index comprises mainland Chinese companies, up from single figures in 1997 when Hong Kong was returned to China. Is that number expected to continue going up?

We don’t actually have any target or objective in terms of total market capitalization of our market, be it at the Hang Seng level or in the market generally.

The market cap of the mainland companies is about 55 percent. In terms of securities trading, they account for about 65 percent to 70 percent of the daily average turnover. That should not be surprising, bearing in mind that we are part of China.  

Last year the HKEx announced a closer cooperation agreement with the Shanghai stock exchange, even though strictly speaking you are domestic competitors within China…

We’ve always been close to the Shanghai and Shenzhen stock exchanges since they started in 1990.

We have regular meetings, both at management level and very senior level. Last year we announced that we were in discussions with Shanghai and Shenzhen to see whether we can form a joint venture company in Hong Kong, the purpose of which is to develop index-linked products, derivatives products, so that we can trade them in Hong Kong.

We also initiated discussions about the possibility of listing Hong Kong-linked exchange-traded funds (ETFs) on the mainland exchanges as well as listing renminbi-denominated, mainland-linked ETFs in Hong Kong.

Together with the internationalization of the renminbi, it gives the three exchanges quite a lot of scope for cooperation.

How much of a boost to Hong Kong and the exchange is the globalization of the renminbi?

The benefits initially come in the area of traditional banking, primarily because it is clearly the mainland government’s policy to encourage the use of the renminbi for trade settlements.

Roughly speaking, at the start of 2010, the amount of trades settled in renminbi was about 0.7 percent.

By the second half of 2010 it had gone to 4 percent. In the first half of 2011 it jumped to 7 percent, then in the second half to about 9 percent or 10 percent.

So within a two-year period there was more than a 10-times increase in renminbi trade settlements.

About 70 percent or 80 percent of these trade settlements are done through banks in Hong Kong.

At some stage there will be demand for renminbi-denominated exchange-traded products and as an exchange we are totally ready to accept a listing of renminbi-denominated shares, or even in dual currency – Hong Kong dollars and renminbi – for companies that have the need for both.

What’s your gut feeling about the renminbi: how far is it from rivaling the US dollar as a global reserve currency?

Much as any country may wish to have something for its currency, it is really up to the international markets to determine whether there is in fact that investment cache.

In terms of the renminbi, the gradual relaxation of controls, through internationalization of the currency and through the encouragement of trade settlements, will of course create a huge pool of renminbi outside of mainland China. That leads to a demand for renminbi-denominated investment products.

As this goes on, I’m pretty sure that from a currency for trade settlement it will become a currency for investment.

Ultimately, there is no reason why it won’t become acceptable as an international currency, at some stage or other – perhaps a little way down the road.

Another big development, looming closer on the horizon, is the upcoming leadership changes both in Hong Kong and on the mainland. How will that affect Hong Kong and the HKEx?

From our perspective, we have gone through a change of leadership since 1997. Indeed, for an international market like us, it is not just a change of leadership in Hong Kong or mainland China, but globally, too.

In fact, there is probably more concern about the leadership changes elsewhere in 2012. You have some pretty important elections in the US and France this year!

As with all of these things, however, life will definitely go on. It’s just a question of the HKEx and the markets changing and adapting to any variations in policy as quickly as we can.  

How often do you meet up with your exchange peers under the umbrella of the WFE?

We normally have two board meetings a year, and then we also have in conjunction with one of them the general assembly or AGM, so we see each other at least twice a year.

But there are other meetings and telephone conferences that we get on with. They’re all quite busy doing their own thing.

Most of them are CEOs of their respective exchanges. so a lot of contact is done by calls, conferences and emails out of our secretariat in Paris.

Last year was particularly busy for stock exchange mergers. Is consolidation a hot topic of conversation at the WFE?

Obviously, all of us follow what happens in the exchange world very closely, although I suspect each of us has different thinking, otherwise we’d all be going after the same things.

For our part, we keep a very close eye on developments. But if you look at the last couple of years, attempted mergers have been known more for their failures than actually getting the deal done.

Following the blocking of the NYSE/Deutsche Börse, do you think there will be any other merger activity in 2012?

I’m sure there will be attempts by exchanges to see whether mergers are advantageous for them.

For our part, we believe M&A is not the only way to go; it doesn’t necessarily have to involve a merger or even, indeed, a crossholding of shares.

Another thing we did last year was to get together with the leading exchanges in Brazil, Russia, India and China.

Within a matter of three or four months of us initiating discussions with them, we signed a memorandum of understanding saying that we would try to cross-list our benchmark indices on each other’s markets.

Hopefully we will be able to achieve that by the first half of this year, so there are other ways of cooperating without getting into each other’s hair, so to speak.

Consolidation aside, what topics are likely to be on the agenda when the WFE next convenes?

Over the past couple of years, one of our primary concerns has been the regulatory climate and the issue of fragmentation of the market with the development of alternative markets.

The regulation of exchanges and the regulation of those alternative platforms have not really been on the same level.

We are far more tightly regulated than alternative trading platforms and exchanges like New York and London, for instance, which – to a large extent – have had their equities trading cannibalized.  

These are things policy makers need to think about. One of our primary purposes is capital formation and capital raising in the primary market and the trading of those shares, of those issuers, in the secondary market so that investors and shareholders get liquidity, good corporate governance, transparency, price discovery and all that.

With some of the alternative trading platforms, like the dark pools, you don’t get the same level of participation, transparency or price discovery.

These are issues that clearly concern the members of the WFE and that the federation raises constantly with policy makers, particularly now that the review has been undergone in both the US and Europe under MiFID II.

The WFE comprises about 54 of the leading exchanges in the world, with a combined market cap of $53 tn, so it behooves us to draw these issues to the attention of policy makers and the regulators to see how we might get a level playing field.

Finally, where do you stand on the eurozone: do you think it will emerge from its current quagmire or sink to inescapable depths?

There are really two discussions right now in the eurozone. One is the currency and the other is the economy.

In Asia, we are more concerned about the European economy and its prospects, or lack thereof.

Whether or not the euro as a currency will survive, the leaders in the eurozone are all fully aware of the consequences if something were to go pear-shaped with the currency.