ALEX BRUMMER: China having grip on our stock exchange
ALEX BRUMMER: China having a grip on our stock exchange is fraught with danger – it must be resisted
Sitting in the shadow of St Paul’s Cathedral, the London Stock Exchange (LSE) is a shining symbol of the City’s huge contribution to Britain’s economy.
Banking, insurance and finance earn this country a surplus of £60 billion a year on services provided to the rest of the world. They account for more than 10 pc of national output. And they are Britain’s biggest taxpayers.
With a trading history dating back to 17th-century coffee houses, the LSE is seen as a ‘super-casino’ for shares.
But its vital importance to Britain and the global economy goes far, far deeper.
Crucially, as the world economy evolves at a rapid pace, it is where innovative, science-based UK start-ups go to raise cash to take on the world.
The London Stock Exchange located behind St Paul’s Cathedral is a shining symbol of the City’s huge contribution to Britain’s economy
Natural resources giants from every continent regard it as the best place to trade their shares and finance their operations. It is a huge data powerhouse used by investment funds — running pensions and savings worldwide.
Most importantly, the LSE owns the London Clearing House, the world’s busiest platform for trading and settling derivative transactions in shares, commodities, bonds, currencies and interest rates. It handles trillions of pounds of dealings every day.
The value and quality of what it does — and its status as a publicly quoted company — have inevitably made it a prime target for foreign predators.
The other two granite pillars of the City, the Bank of England and Lloyds of London (home to the insurance market) cannot be sold because they have protected ownership structures.
But the LSE (confusingly with the same initials as the London School of Economics) has often been seen as easy prey.
On average, it has been subject to aggressive bids once every two-and-a-half years since it went public in 2000.
The most recent predator is the hugely ambitious Hong Kong Stock Exchange, which has already enjoyed success raiding the City of London.
It bought the London Metal Exchange (LME), where traders famed for brightly coloured jackets buy and sell everything from copper to cobalt.
But the LME, snapped up by the Hong Kong Exchange for £1.4 billion in 2012 in the aftermath of the financial crisis, is a mere bagatelle set against the London Stock Exchange.
The flags of the Hong Kong Stock Exchange, China and Hong Kong. Charles Li, who runs the Hong Kong Exchange, believes there is a compelling case for bringing the markets together
The latest Hong Kong dragon breathing fire across London is having to offer far more (£32 billion) hoping to seize control.
Charles Li, who runs the Hong Kong Exchange, believes there is a compelling case for bringing the markets together.
If Britain eventually frees itself from the perceived shackles of being in the EU, such a deal would help open the door wider to business in Asia-Pacific, a region set to become the world’s richest, overtaking North America and Europe.
Indeed, the Hong Kong Stock Exchange has outpaced the mighty New York Stock Exchange for much business.
But, if ever there was a mega-deal more fraught with danger for the London Stock Exchange, for its independence, its integrity and the big data that it controls, it would be a deal with Hong Kong.
At any other time, such a deal might be seductive.
However, Asia’s top financial centre and container port is in political turmoil. Street riots, daily protests and the former British colony’s beleaguered leader under pressure from Beijing to defuse public anger have destabilised Hong Kong.
Its governance and pre-eminence as a financial centre are under the greatest strain since the Union flag was lowered there in 1997.
The embattled legislature has struggled to steer a path between Beijing’s influence and the region’s unfettered capitalist tradition.
Advocates of the London Stock Exchange deal ignore the fact that half the board of the predator are appointed by the Hong Kong government, doubtless with the approval of its Chinese masters, and that the Hong Kong administration owns 6 per cent of the shares, allowing it a big influence.
There is a paradox, too, in that Beijing has not encouraged the raid on London. As it seeks to wrest back control of Hong Kong streets, it does not want any development, such as the purchase of the London Stock Exchange that could strengthen the former colony’s financial independence.
Indeed, the People’s Daily, a Communist Party mouthpiece, published a scathing critique of the deal, cataloguing numerous geopolitical and business reasons against it. And woe betide anyone who underestimates the Beijing government’s power and influence.
Staff at Hong Kong’s flagship airline, Cathay Pacific, certainly don’t. They were told that they risked being fired if they ‘support or participate in illegal protests’. Several were duly dismissed. This was seen as the firm bowing to the Beijing aviation regulator’s demands.
In any case, the bid for the London Stock Exchange does not follow normal rules. In most proposed deals, decisions are principally based on price.
However, the unsolicited Hong Kong bid for the LSE, even if attractive to investors, would be subject to rigorous regulatory scrutiny. As well as British regulators, their U.S. counterparts, who have a much more defensive attitude, will want a big say.
The U.S. Committee on Foreign Investment, which reviews deals involving overseas investment to determine the effect ‘on the national security of the United States’, would probably want to scrutinise the deal.
Significantly, on Tuesday, the Trump administration proposed new rules to allow America to exert greater control over foreign investment by broadening the government’s authority to block technology and property deals.
The idea of China having direct access to one of the globe’s foremost financial markets is anathema to the U.S. government at a time when its relations with Beijing are so uncomfortable.
For their part, bosses at the London Stock Exchange, supported by Goldman Sachs and a powerful alliance of investment bankers, have already rejected the overture from their Hong Kong rival in no uncertain terms.
Instead, the board is very keen to press ahead with the £22 billion purchase of Refinitiv, which runs the Reuters financial data service and computer screens used by traders around the globe.
It is supported by leading City of London figures who welcome a deal for Refinitiv because it would strengthen the LSE’s big-data business and offer powerful competition to Bloomberg and New York Stock Exchange owner ICE.
All of this is happening in the context of Britain’s history in Hong Kong dating back to 1841 and powerful financial ties over recent decades. For example, the UK’s biggest bank, HSBC, has its origins there. And the Prudential is one of the most high-profile insurance providers in China and across Asia.
There will doubtless be investors and policymakers who see the deal for the London Stock Exchange as consistent with this strong tradition.
However, that is a terrible misunderstanding of the potentially devastating pitfalls.
The Hong Kong bid for the LSE is by the wrong people, at the wrong time and at the wrong price. It is no exaggeration to say that, if successful, it could pose a systemic threat to global financial stability.
It must be resisted.
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