FOCUS: Asia’s Exchanges Watch ASX-SGX Plan But HKEx Unlikely Scathed

Singapore Exchange Ltd.’s (S68.SG) US$8.3 billion takeover bid for ASX Ltd. (ASX.AU) may prompt some soul searching from regional exchanges with smaller exchanges moving faster toward alliances but heavyweights such as Hong Kong and Tokyo are unlikely to follow suit anytime soon.

On Monday, SGX said it has made a bid for the operator of the Australian Securities Exchange, to create the world’s fifth largest listed exchange operator in terms of market capitalization. The takeover would create roughly a US$1.9 trillion combined market, potentially luring away fee-paying customers from Hong Kong and Tokyo.

“It is a reminder that potential competition is out there,” said Hong Kong shareholder activist and former HKEx director David Webb.
Among other things, the merged entity could boast the largest sector of real estate investment trusts with 80 listings and the largest number of exchange-traded funds in Asia Pacific, said Stephen Edge, founder of Hong Kong-based Asia ETrading and a former Citigroup trader.

While politics and regulatory hurdles on foreign ownership may stand in the way of consolidation elsewhere in the region –government approval is required to buy more than 5% of Hong Kong’s exchange, for instance– the deal could open the way for some linkages.

“The ASX-SGX merger demonstrates the need for all international financial centres and players to have a clear strategy to ensure their strength going forward so as not to be marginalized,” said Alan Ewins, a partner at Allen & Overy in Hong Kong.

Asian exchanges have failed to follow the lead of their European and U.S. counterparts, staying away from cross-border tie-ups largely due to tough regulatory restrictions. Even SGX’s proposed buyout of the Australian exchange is faced with several hurdles, including parliamentary approval in Australia.

But regional exchanges have been looking for ways to generate growth and push trading costs lower. In February, four stock exchanges of the Association of South East Asian Nations signed an initial pact with NYSE Technologies for the technology needed to establish a trading link among them. The four were the SGX, Bursa Malaysia, the Philippine Stock Exchange and the Stock Exchange of Thailand.

“The goal was to establish cross-border trade among Asean countries, but it has failed to get off the ground amid a lack of political will,” said Neil Katkov, senior vice president of Celent in Asia, adding that an SGX-ASX merger may also push Western exchanges to look to Asia for partners.

It’s a different story for Hong Kong Exchanges & Clearing, widely seen as the go-to venue for all types of Chinese listings, as well as overseas commodities companies.

The market is home this year to the world’s two biggest global initial public offerings — the record-breaking US$22.1 billion IPO of Agricultural Bank of China Ltd. in July, and the up to US$20.6 billion IPO by American International Group Inc’s pan-Asian life insurer AIA Group Ltd. — and is unlikely to look too far from home for growth.
While in terms of the market capitalization of its component stocks, HKEx is just the fifth largest in the world, behind New York, London, Tokyo and India’s National Stock Exchange and Bombay Stock Exchange combined, according to data from the World Federation of Exchanges, as a stock, HKEx is the most highly valued among exchange operators.
“I don’t think the SGX-ASX merger will put too much pressure on Hong Kong because it’s positioned itself as the gateway to China,” Asia ETrading’s Edge said.

Hong Kong may instead opt to merge at some point with the Shanghai or Shenzhen markets, where several Hong Kong-listed stocks of Chinese companies are also traded. But given the lack of convertibility of the yuan, and other political issues, such a merger is still a few years away, an analyst said.

HKEx is planning to denominate some stocks in yuan, hoping to benefit from its status as China’s offshore yuan center.

“Hong Kong Exchanges’ position is quite unique because it has a monopoly on the renminbi business,” said Amy Lee, a regional analyst at Nomura.

Most of the stock exchanges in the region declined to comment on the ASX-SGX deal, with HKEx repeating its oft-stated stance that it won’t merge for financial gains but will consider international alliances and partnerships that are in keeping with its focus on markets in China.
The Tokyo Stock Exchange is also likely to go it alone for now.

“The TSE is constrained by its unlisted status, which makes it very hard for it to participate in M&A,” said Derek Ovington, analyst at CLSA. “I think deals such as SGX-ASX, even if it does not proceed, will increase the pressure on TSE to address its listing.”

Weak earnings, coupled with the recent financial crisis, have hurt the Tokyo stock exchange’s plans to list several times, but it has said it plans to go public sometime after its 2010 fiscal year.

The chief executive of Malaysian stock exchange operator Bursa Malaysia Bhd (1818.KU), Yusli Mohamed Yusoff, said more collaborations among regional exchanges could result from this deal, adding that the exchange is open to “synergistic opportunities” with other exchanges.

Officials at the Taiwan Stock Exchange and the Indonesian Stock Exchange said there could be more pressure for cooperation in the region but there were no plans for any immediate tie-ups.

-By Nisha Gopalan and Kate O’Keeffe, Dow Jones Newswire

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