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By Lawrence White and Saikat Chatterjee
HONG KONG Feb 26 With nearly half of its market
value wiped out in the last three years, Hong Kong's stock
exchange is hoping that a slate of new initiatives will give it
a much needed boost after reporting worse than expected annual
earnings on Wednesday.
Hong Kong Exchanges & Clearing Ltd 0388.HK, as it's
formally known, has pinned hopes on a HK$3 billion ($386
million) technology upgrade, a push into yuan-denominated
products and its $2.2 billion purchase of the London Metal
Exchange (LME) in 2012.
HKEx, the world's fourth largest exchange operator, reported
a lower than expected 11 percent rise in annual earnings, as a
recovery in stock trading volumes last year was offset by
increased expenses from the LME.
HKEx's net profit for 2013 was HK$4.55 billion ($586.22
million), the company said in a filing on Wednesday, just below
the HK$4.7 billion analysts expected according to Thomson
The LME deal is so far acting as a drag on profits for HKEx,
as the London exchange's contribution of a HK$326 million profit
in 2013 was offset by its addition of operating exepenses of
Some of those costs came from the LME building its own
clearing house, LME Clear, which should begin contributing fees
when it launches in September this year.
The LME has also been embroiled in a U.S. lawsuit. 26 class
actions have been filed against LME alleging anti-competitive
and monopolistic behaviour in the warehousing industry, HKEx
said in its statement. The plaintiffs must file consolidated
complaints on March 12.
The HKEx is betting on a bigger menu of yuan-denominated
products in bonds, commodities and equities as Hong Kong strives
to cement its position as the world's biggest offshore yuan hub.
Last week it listed the first Exchange Traded Fund, or ETF,
outside China that tracks the onshore bond market.
A resurgence in initial public offerings late last year
boosted total annual listing fees by just one percent to HK$586
million, underlining how IPO revenues alone are not the answer
to HKEx's turnaround.
BEYOND CASH EQUITIES
Indeed, the exchange is urgently trying to tap new areas of
growth and diversify away from the traditional areas of cash
equity trading and equity offerings by Chinese companies.
Otherwise, the HKEx stands to lose ground as China moves
towards its goal of full convertibility of the yuan, which would
allow foreign investors to trade on mainland exchanges in
Shanghai and Shenzhen, unfettered by quotas or other
"If China opens up too fast, or if China finds that Hong
Kong can't deliver the things it wants, then we will lose our
edge," chief executive Charles Li told the audience at the Asia
Financial Forum in Hong Kong last month.
With a market capitalization of around $18 billion, Hong
Kong's stock exchange has fallen to fourth place from first
among publicly-listed international bourses, due in part to a
drop in IPO volumes since 2011.
HKEx's $6 billion to $7 billion of daily turnover now pales
in comparison to New York, Tokyo and mainland China exchanges,
where daily turnover at each is at least four times higher.
Meanwhile, rival exchanges such as the CME Group Ltd CME.O,
Intercontinental Exchange and NYSE Euronext NYXn.BCO are
encroaching on the HKEx's turf, offering their own commodity and
CME, for example, sees an average daily trading volume for
its yuan-denominated forex and bond products of $40 billion.
That compares to a daily average in January of $774 million for
HKEx's offshore yuan futures, according to company data.
Regulatory hurdles also loom.
HKEx's new data center is aimed at improving its
high-frequency trading (HFT) offering, at a time when Hong Kong
regulators have labelled such trading as potentially disruptive.
"Exchanges have to walk a fine line in attracting liquidity
and allaying public concerns about HFT," said Hani Shalabi, head
of advanced execution services, Asia Pacific at Credit Suisse.
($1 = 7.7616 Hong Kong dollars)
(Additional reporting by Vikram Subhedar and Melanie Burton in
LONDON; Editing by Simon Cameron-Moore)