Hong Kong Exchanges and Clearing Analysis – January 2022

Hong Kong Exchanges and Clearing Limited (Symbol: 0388.HK) is a publicly listed stockmarket and derivatives clearing house operator. In the past 6 months, the Chinese government have made clarifications related to overseas stock listings and mainland derivatives trading. It said Hong Kong would not be subject to new data security rules for companies with more than 1 million users. Scrutiny of Chinese companies listing overseas in the United States has prompted backlash not just among American lawmakers and regulators but also from China itself. The central Chinese government wants to change the typical path a big company takes when looking to raise money through an equity offering. That path is to use the Variable Interest Entity model, a way of bypassing restrictions on foreign investment inside China.

According to CNBC “The U.S. Securities and Exchange Commission this month finalized rules to implement a law that would allow the market regulator to ban foreign companies listed in the U.S. from trading if their auditors do not comply with requests for information from American regulators.” As US regulators (and potentially lawmakers in the future) crackdown on Chinese companies, Chinese may see a surge in listings and initial public offerings (where operators make a big chunk of their money).

The world’s second largest economy could also see inflows to stock trading coming from leftovers of retail investors property investments, the typical retirement approach for a majority of Chinese that has imploded in recent months. HKEX operates not only the Hong Kong Stock Exchange but also the Shenzhen and Shanghai ones too. Perhaps they may even takeover National Equities Exchange and Quotation, which operates the relatively new stockmarket in Beijing designed for small and medium enterprises.

The Chinese government introduced a draft legislation of a comprehensive legal framework for the operation of futures and over-the-counter derivatives markets in China, making clear views of enforcing close-out netting (a form of contract settlement) in derivatives trading. It’s an important step towards having functional derivative markets and good news for HKEX which operates them. China continues to evolve with financial liberalization and efficient markets. They also recently opened up stock and commodity derivatives to foreign investors. Once last statistic to look at is the number of unicorns (privately-held companies worth more than $1 billion) in China, right now its behind the United States but far ahead of any other country.

But it’s not all good news. A crackdown by the central government on tech stocks and property developers has lead to some pretty big losses. Slower growth of 4%  (annualized) was the latest data for Q4 2021 in China.

There may be some turbulence ahead in order to control the fallout from the property sector, but that aside the future looks bright for HKEX.

I have no positions in any stocks mentioned in this article.


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