September 25, 2019 / 10:17 AM / 22 days ago

Breakingviews - Hong Kong’s LSE bid conceals a shrewd Beijing view

Hong Kong Exchanges and Clearing Ltd Chief Executive Charles Li speaks during a news conference announcing the annual results in Hong Kong, China March 2, 2016.

HONG KONG (Reuters Breakingviews) - Beijing can confuse even politically savvy executives. David Schwimmer, chief executive of the London Stock Exchange Group, says China is opening up. Yet his opposite number at Hong Kong Exchanges and Clearing has partly based an audacious bid for the British bourse on the opposite. Experience suggests Charles Li’s assessment of capital controls is more astute.

Schwimmer, a former banker appointed to the top job last year, says he sees capital controls in China evolving, adding this week that “the trend is that they are slowly but surely being removed”. Speaking at the same Sibos banking conference, Li offered an alternative view. The idea of China relaxing rules on money flows has been around 20 years already, and, he said, “we’re going to continue talking about it for 20 more years”.

The debate has real implications for their battle of the bourses, and for the future of Li’s rebuffed $37 billion cash-and-shares bid for LSE - now worth a tad less, after HKEX shares dropped. If Schwimmer is correct that Beijing will make strides towards opening its capital account, it might make sense for LSE shareholders to bet on expanding the bourse’s link with Shanghai. But if Li is right that controls will remain in place for the foreseeable future, the case for a tie-up with Hong Kong looks a little better, given its already deep channels into mainland capital markets.

History points in Li’s direction. China’s capital account opening has been just over the horizon for years. But at each juncture, policymakers have kept barriers, worrying that large cross-border flows of cash might shake the currency or weaken the domestic financial sector. If anything, the trend since 2015 has been tighter control. Li is right to point out that wishful thinking has not played out in practice, a thought that will ring familiar to many Western executives pining for more access to the People’s Republic.

None of this means Li’s formula for combining the exchanges is necessarily the right one. The Hong Kong bourse’s acquisition of the London Metal Exchange, for example, didn’t live up to its China hype. LSE has an alternative deal with Refinitiv, and any takeover by HKEX will face considerable political and regulatory hostility. Li may still be proved right on China’s enduring capital controls.

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