HongKong

Hong Kong/HKEX: future planning


Hong Kong faces its biggest threat yet to its status as Asia’s financial hub. Beijing aims to tighten its hold on the city state. Local share prices extended recent losses on Wednesday as police fired pepper balls at protesters. Hong Kong’s exchange operator, unfazed, plans to expand its derivatives business with MSCI.

HKEX will start with the launch of 37 futures and options contracts — mostly based on the most important Asian indices but including some emerging markets. Any contracts currently traded on the Singapore Exchange (SGX) will expire as its agreement ends with MSCI next February. The MSCI Singapore index contracts will remain listed.

The strategy makes sense. Hedging tools to match growing investor interest in the region’s low valuations have been in high demand. The contracts will add volumes — and fees — for HKEX. For the SGX, about a fifth of its equity derivatives volume came from MSCI index futures in the first quarter.

HKEX’s shares have bounced recently, even without the promise of extra volume. They are up 28 per cent from a March low, compared with a 7 per cent gain in the benchmark Hang Seng index. More important, its local market monopoly means it earns stunning ebitda margins of 74 per cent.

Resilient demand for mainland stocks has made it a defensive stock amid the outbreak. Revenue from trades on the Stock Connect — which allows mainland Chinese investors to buy shares in Hong Kong and vice-versa — rose 74 per cent in the first quarter to a quarterly record, as undeterred mainland investors scooped up bargains.

Still, there are reasons for concern. Despite heavy technology investment, HKEX has been hit by trading glitches, with disruptions that included its derivatives platforms. It is vulnerable to further investment losses given a weak outlook for equities.

The bigger long-term risk is that demand for the newly offered derivatives contracts will not be enough to offset foreign funds leaving the city amid renewed political unrest. Betting on HKEX’s future now looks as risky as the derivatives contracts the exchange will take on.

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