On October 19, staff of a moving company help pack the belongings of a loyal employee surnamed Cheng (alias). She has been working on the trading floor of the Hong Kong Stock Exchange (HKEX) since 1994. The historical hall where she has worked for more than two decades is currently in the process of closing down as activity on the floor has dwindled since stock dealing became fully computerized. HKEX said the hall would be remade into an exhibition and event space for the city’s financial markets. Photo: VCG

Hong Kong Exchanges and Clearing (HKEX) made an abrupt announcement on Wednesday that it intends to merge with London Stock Exchange Group, a move that could link the financial markets in the mainland, Hong Kong and London more closely, experts said. 

HKEX made an offer for LSEG, valuing the latter at 29.6 billion pounds ($36.56 billion), according to an HKEX statement released on Wednesday. 

“We are early in the process so I can’t go into too much detail at this stage, but after many months of consideration we believe we have put forward a proposal that is ambitious, far-reaching, and could have a transformative effect on global financial markets,” Charles Li Xiaojia, chief executive of HKEX, said in a statement on HKEX’s website on Wednesday. 

Li called this announcement “a significant milestone” for Hong Kong. 

“Our city has shown time and time again that it thrives when competing against the top financial centers in the world, moving from its historic role as a regional center to a global hub,” Li wrote. 

Li said that Hong Kong and London’s stock exchanges together will create a leading global exchange that “spans Asia, Europe and the US” with a market value of more than $70 billion. He also called the combination of the two stock exchanges “a great match.” 

According to Li, the partnership will strengthen ties between the UK and China, particularly in economic and trade terms. “China benefits from the deal by receiving additional international financial market support as the yuan internationalizes and its capital markets become more open. This transaction could help provide new interconnections for stocks, bonds, indices and other financial products, which could be important channels to support China’s full use of global financial infrastructure,” he said. 

The offer comes at a time when Hong Kong’s financial markets have been hit hard by the city’s ongoing riots. The Hang Seng Index started to plunge from early July and kept falling till mid-August. It has climbed slowly since then and stood at 27,159 points on Wednesday.

Hong Kong Chief Executive Carrie Lam said on Tuesday that Hong Kong’s financial markets and banking system have operated as normal in the past few months, and that Hong Kong’s core competence had not been influenced by the recent events. 

Li Xiaobing, an expert on Hong Kong, Macao and Taiwan affairs in the Nankai University in Tianjin, said that cooperating with the UK could be a “successful landing” for China in Europe that would open further cooperation opportunities in areas like 5G and artificial intelligence, while pressure from the US mounts.  

Mutual access easier 

Experts said that the merger was based on both stock exchanges’ desire to seek “good sources” to cope with market uncertainties. They also said that it would help with the opening-up of the mainland capital markets, as mainland and UK investors would get better access to each other’s equity markets. 

“After Brexit, the UK’s status as a global financial center will be affected as it would see decreasing transactions, and the enhanced cooperation between the London and Hong Kong stock exchanges will help the UK to tap into Chinese capital markets and attract more investment,” Liang Haiming, dean of the Belt and Road Institute at Hainan University, told the Global Times on Wednesday. 

Likewise, Chinese investors should have easier access to London-listed shares after the merger, said Zhao Xijun, vice director of the School of Finance at Renmin University of China. 

“For China, the merger of HKEX and the London Stock Exchange would push forward the opening-up policy, especially in the financial sector, in which the central government deployed 11 measures to further open up to foreign investors in July,” Tian Yun, vice director of the Beijing Economic Operation Association, told the Global Times on Wednesday. 

“The merger could also help the further internationalization of the yuan and the further opening of China’s financial market,” Tian noted.

Dong Shaopeng, a veteran analyst close to the China Securities Regulatory Commission, also said that mergers and acquisitions are a global trend to increase competitiveness and lower transaction costs. “The merger will help investors, listed companies and third-party institutions to create positive synergies,” he told the Global Times. 

But Tian cautioned that despite such an offer, there are many uncertainties about whether it will go ahead. “China should be fully prepared for the US reaction,” said Tian.