Wanted: An Exchange Chief With Conflict Management Skills

(Bloomberg Opinion) -- Hong Kong’s stock-exchange operator is at a crossroads. Just like its home city, Hong Kong Exchanges & Clearing Ltd. needs to find a path through a turbulent era that reconciles its international and Chinese identities.

HKEX is hunting for a new chief executive officer after Charles Li said he will step down by October next year at the latest, when his contract expires. Nicknamed “Mr. China” for his success in building trading links with mainland exchanges, Li doubled revenue during his decade leading the company. An attempt to vault HKEX into the top ranks of global exchange operators failed last year when the London Stock Exchange Group Plc rejected a $37 billion takeover approach, citing concerns over its relationship with Hong Kong’s government, which is appointed by Beijing.

Li’s successor will have to carry forward his work of deepening ties with the Shanghai and Shenzhen exchanges, while keeping foreign investors happy by improving corporate governance. It’s a delicate task. The mainland Chinese markets are competitors as well as partners. Hong Kong is trying to position itself as the venue of choice for Chinese technology companies seeking to go public, especially as the U.S. market becomes less hospitable. Shanghai and Shenzhen are undertaking their own initiatives to persuade companies to list at home.

Shanghai has been particularly aggressive, becoming the world’s top destination for initial public offerings in 2020 (albeit without a single overseas listing), a title that Hong Kong has held for years. While its Star market aimed at tech companies has yet to attract any big names, competition is heating up. Shenzhen, the southern city that borders Hong Kong, is preparing to emulate Shanghai by moving to a registration-based IPO system and scrapping limits on price movements on its Nasdaq-like ChiNext board.

That will put a premium on finding a CEO who can match Li’s mainland connections and diplomatic prowess. With international expansion seemingly blocked off after the LSE rebuff and the coronavirus outbreak, HKEX’s growth will continue to rely heavily on cooperation with Chinese exchanges and regulators.

Expanding the stock-trading pipes that Li established with Shanghai and Shenzhen is one route. HKEX scored a coup when New York-traded Alibaba Group Holding Ltd., China’s biggest company by market value, raised $13 billion in a Hong Kong secondary offering last November. Some of the sheen came off the celebrations when it emerged that Alibaba wouldn’t be included in the so-called Stock Connect programs, blocking mainland-based investors from trading the shares. Getting secondary listings on the Connect should be a priority — especially given Hong Kong is looking to woo other U.S.-listed Chinese companies such as JD.com Inc.

There are further opportunities for expanding the cross-border trading links, including letting mainland investors buy overseas bonds. Currently, the three-year-old Bond Connect is a one-way system, allowing Hong Kong investors to buy mainland securities but not vice-versa. The next HKEX chief may also push for Hong Kong ETFs and IPO subscriptions to be admitted to the connect programs.

At the same time, Hong Kong needs to keep its international flavor if it’s to appeal to Chinese punters who want access to global investments. HKEX slowed efforts to attract foreign listings in recent years, as volumes dimmed, having drawn some notable names including Italian luxury house Prada SpA. It should restart these.

Hong Kong’s role as an international market depends critically on sustaining confidence among global investors that it is relatively clean and well governed. Under Li, the Hong Kong exchange bowed to the commercial imperative by opening the door to dual-class share structures and presided over a market where bad behavior among small-caps was endemic. His replacement will need to change Hong Kong’s reputation as a playground for short sellers such as Carson Block’s Muddy Waters and Gillem Tulloch’s GMT Research Ltd.

Managing these push-pull conflicts — moving closer to China while becoming more international, building up business while improving governance — will take some dexterity. Li has said he may leave before the end of his term if a successor is found. An early exit is far from assured.

--With assistance from Zhen Hao Toh.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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