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Connecting: HKEx’s Li Said It Will Help Connect To China’s Trillions

Hong Kong Exchanges and Clearing is all about connecting. HKEx’s CEO Charles Li says his exchange is the linchpin that connects mainland China’s markets with the rest of the world.

Li, who spoke with John Lothian News editor-in-chief Jim Kharouf at the FIA Boca conference, said his exchange is about strategic positioning with China and taking advantage of the explosive growth it sees, especially with the London Metal Exchange firmly integrated into its business.

“Our job is to find a way to make that connection,” Li said, of China, “the largest pool of capital that is yet to be globally deployed.”

HKEx has come a long way since 2000 with the merger of its stock, futures and clearing entities. The exchange, now the 14th ranked derivatives exchange in the world, spent last year integrating LME into its business, and forging new management and IT initiatives.

“So we got all three done, consolidated, integrated and insourced the IT, changed the team and fundamentally transformed that institution both from a management, financial reporting and technology perspective,” said Li.

The exchange also launched its own clearinghouse for LME in September 2014. With that legwork done, Li said 2015 is really about “delivering.” In Hong Kong, the exchange has built and initiated the trading linkage called Shanghai-Hong Kong Stock Connect, last November, a move that Li believes will further strengthen its positioning with mainland China.

“It’s a fantastic success and we’re now building onto it,” he said. “For the Hong Kong business, we’re really going to build onto the connect program. Everyone thinks Connect is a simple linkage of two exchanges, but it actually goes well beyond that because we’re talking about building a potential model of connecting the last pool of capital that has yet to be globally deployed, and finally connect that with the rest of the world.”

Li, said what is even more compelling about the linkage and freeing up trading on both markets, is the sheer size of the capital pool in China.

“If the MSCI Emerging Market Index were to include China, we’re talking about a few hundred billion dollars that needs to go into China,” Li said. “But that, in the context of domestic liquidity on the domestic side, is even more significant because China’s banks have about US$22 trillion sitting in there. The capital market is only about US$5 trillion, and that’s a four- or five-to-one relationship whereas the US has about $17 trillion in both GDP, marketcap, banking assets.”

In terms of products available, Li said that the linkage will start with Shanghai and Hong Kong stocks. But he said, plans are to add other products such as equity derivatives, commodities, fixed income and currencies. Plans are also add the Shenzehn Stock Exchange as well.

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