By JEFFREY NG And FIONA LAW
HONG KONGâ€"Hong Kong Exchanges & Clearing Ltd. said it has formed a joint venture with China's Shanghai and Shenzhen stock exchanges to develop index-linked and equity derivative products, its latest move to integrate with the mainland's burgeoning markets.
The news comes as the Hong Kong exchange awaits the outcome of talks to buy the London Metal Exchange for £1.39 billion (US$2.18 billion), which would give the city's stock exchange instant entry into commodities trading as China's appetite for metals grows.
Hong Kong Exchanges has been seeking to expand its status as China's international bourse, diversifying beyond stock trading and initial public offerings in recent years. The euro-zone crisis and China's economic slowdown have hurt investors' appetite for share trading, which makes up the bulk of Hong Kong Exchanges' revenue.
A drought in initial public offerings, following three years when Hong Kong was the world's top venue for listings, has added to its challenges.
The new venture will develop index-linked and equity derivative products, such as exchange-traded funds, the city's sole stock exchange operator said. The products will be supported by cross-border indexes based on products that can be traded on all three exchanges and are expected to be launched by year end.
The three exchanges will each contributing HK$100 million in initial investment capital to the venture, which comes nearly a year after they first announced plans to consider a joint venture.
"Trading volume in these markets will definitely be enhanced, and businesses in all three exchanges will increase from the venture," HKEx Chief Executive Charles Li said at a news conference.
Hong Kong's exchange operator has been pushing hard to strengthen ties with China's markets, saying that increasing the overlap with China is crucial because more than 70% of the trading volume on the local stock market is in China-related securities. Dozens of Hong Kong-listed Chinese companies, known as H-shares, are also listed in Shenzhen or Shanghai with A-share stocks.
Given that the joint venture's initial focus is on index-linked and equity derivative products, Shanghai and Shenzhen's bourses stand to gain more initially, analysts said.
"HKEx already has a well-developed equity-derivatives business so incremental growth here will likely be less than the mainland, where these products are less developed," said Derek Ovington, an analyst at CLSA. "That said, the JV is only just getting started, so growth to material volumes is likely to be a couple of years into the future."
But given China's capital restrictions, including the transfer of the yuan across the border, gains from such a venture will be limited unless the capital rules are changed, analysts said. Mr. Li of HKEx said Thursday the three bourses have no plans for any mergers.
Hong Kong Exchanges first announced plans for such a venture in August, a day after Chinese Vice Premier Li Keqiang, on an official visit to Hong Kong, announced several initiatives aimed at bolstering the city's role as a financial hub.
As part of efforts to further integrate with China's financial markets, the Hong Kong exchange in 2010 unveiled plans to allow locally listed Chinese companies to prepare their financial statements using Chinese accounting standards and mainland auditors to vet them, a decision that has come under scrutiny from some market participants, particularly amid recent allegations of fraud at some Chinese companies listed overseas.
The bourse operator also launched local share listings denominated in the yuan, though so far only one has been completed, amid concerns that the market wouldn't have access to enough of the currency in the city.
Write to Jeffrey Ng at jeffrey.ng@dowjones.com and Fiona Law at fiona.law@dowjones.com
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