Long view trumps volatility as exchanges eye China
LONDON, Sept 25 (Reuters) – For a textbook definition of a market meltdown, China this year might fit the bill: dramatic price swings, trillions of dollars of market value wiped out, new listings halted and crackdowns on alleged malicious short selling.
Yet Western stock exchanges, in a bid to tap growth beyond their relatively mature and saturated home markets, appear undaunted. They are pursuing China tie-ups that may take years to pay off, as emerging markets battle a commodities slump, political scandals and a possible end to the post-crisis era of cheap credit.
Britain and China plan a feasibility study for a scheme to connect the London and Shanghai stock markets, part of a series of initiatives promoted by UK Finance Minister George Osborne as a way to build "stronger links" with the world’s second-largest economy.
On a smaller scale, Paris-based Euronext this week announced a partnership with the Shanghai Stock Exchange to enhance the promotion of its market data in China.
"The balance of power is shifting to new regions," said Rebecca Healey, an analyst at TABB Group. "Exchanges are looking to expand their investment opportunities and get larger economies of scale … It’s a land grab."
The advantage of deeper ties with China in attracting more IPOs is clear – as long as you look past this summer’s shock turbulence. In the first half of 2015, China was the world’s top IPO market by deal volume, according to Ernst & Young, and in the second quarter it won the three biggest deals.
Since then, however, China IPOs have been in a deep freeze and investors have been pulling money out of emerging markets.
China’s road to market liberalisation is a long-term bet, some say. China’s economy is still growing and its household savings are seen as an opportunity; a spokesman for London Stock Exchange said investors saw China not as a one- or two- year play but a "generational" one.
"If you’re in it for the long haul, there is upside in China," said Herbie Skeete, managing director at exchanges research provider Mondo Visione. "But it depends on how long you want to wait."
Those betting on a direct London-to-Shanghai connection may have to wait a while, analysts say. Such a project could easily have a six-figure annual cost and investor appetite may be muted in the short term – aside from this year’s volatility and market losses, time-zone differences may exacerbate thin liquidity.
Skeptics also cite political and regulatory risks. Intervention by the authorities in China has run the gamut from bans on types of trading to public probes and confessions; there are clear differences between how these markets operate.
All of which suggests that while Western exchanges’ search for more growth and trading flows will no doubt be helped by deeper ties with a market like China’s, this year’s volatility and its impact on investor appetite and IPO flow may make the path longer and rockier than expected.
"It’s obviously such a massive economy that people do look at it as a potential opportunity," said Mark Hemsley, Chief Executive of BATS Chi-X Europe. "However, these things are often much more complex than they first seem."