London Can Dominate Post-Brexit With China’s Cash, HKEX CEO Says

(Bloomberg) -- The man who runs Hong Kong’s stock exchange fleshed out his vision for combining with its London counterpart, saying the marriage could funnel Chinese cash to the U.K. capital and make it the world’s dominant financial center long after Brexit.

“In 20 years, together, this city is going to be the renminbi, dollar and euro center -- the center of everything,” Charles Li said at a conference in London. “There’s $27 trillion in the Chinese banking system that needs to be deployed.”

He spoke just after David Schwimmer, chief executive officer of London Stock Exchange Group Plc, who is determined to resist the $37 billion bid from Li’s Hong Kong Exchanges & Clearing Ltd. Schwimmer said Hong Kong may not have a “competitive position” in the future, and that he sees China’s financial hub as Shanghai, where the LSE has a built a hard-won listing link. The LSE has also pointed to Hong Kong’s political unrest as undermining HKEX’s business.

Li disputed this vision of a future where his city gets eclipsed, disagreeing with Schwimmer on the matter of Chinese capital controls, which don’t apply to Hong Kong -- helping preserve the territory’s advantage as a conduit of investment. While Schwimmer said it was “inevitable” that China would lift the controls, Li bets that nothing will change -- and “we will continue talking about it for 20 years.”

“China is afraid of uncontrolled massive migration of funding back and forth,” Li said. In the meantime, Hong Kong and the U.K. share a language and English common law, making the two markets the most natural bridge between China and the U.S., he said.

Government Links

Li also addressed a major irritant for the LSE -- HKEX’s governance structure. Hong Kong’s government holds 6% of HKEX’s stock, appoints 6 of the 13 board members, and the city’s chief executive -- a person appointed by Beijing -- picks HKEX’s chairman. LSE has suggested U.S. and U.K. regulators could thus block the bid on national-security grounds.

“If the transaction proceeds, we are open to changing our governance structure,” Li said.

So far, most investors have preferred that the LSE continue with its $27 billion plan to buy Refinitiv to expand in data -- a deal HKEX wants to block. HKEX is trying to counter this with a charm offensive, hiring UBS Group AG to convince shareholders of the merits of its own proposal, people familiar with the matter said in recent days.

It was “now or never,” Li said on Tuesday. “We know the odds are low, and the other side is engaged -- not exactly the best time to make a proposal. But our conviction is so deep, and so profound, that we have to take some risk and take some loss of face because the other side will reject us.”

“If I was in David’s shoes, I would reject Charles Li,” he said. “That’s the nature of things. I accept that.”

Li said his deal wasn’t about slashing costs.

For all the other [proposed exchange takeovers] the opportunity wasn’t incrementally increasing. M&A was driven by cost synergies, which is firing people. It’s easy to say get rid of the people, but harder to say whether, when you get rid of the people, whether the opportunity they are working on will get lost as well.

Li on how his bidding plan was disrupted by Brexit delays:

I regret to say we were late. We have wanted to do this for quite a while, but we thought we could wait a bit more. We thought Brexit would create uncertainties that we could live without. Waiting for March 31, and then October ... and then events overtook it.

Li on the future of Brexit London with a HKEX deal:

This great city became a global financial center 34 years ago because you became the dollar center outside of the U.S. The value proposition that the U.K. presents to America is going to be so much more. U.K. and America are so connected already. Being able to connect with Asia in such a manner: just imagine the U.K.’s bargaining power on that global scale.

To contact the reporters on this story: Viren Vaghela in London at vvaghela1@bloomberg.net;Benjamin Robertson in London at brobertson29@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Keith Campbell, Marion Dakers

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