LSEG London Stock Exchange Group Plc

Potential threat by Beijing to capitalist hub looms over bid for London marketplace

By Steven Russolillo and Stella Yifan Xie 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 13, 2019).

Charles Li, the head of Hong Kong's stock exchange, has built his career and company's success on China. Now that could prove to be his biggest challenge.

The prospect of tighter control from Beijing is threatening the rule of law that underpins Hong Kong's role as a financial hub. And political and security concerns could help scuttle an unsolicited $36.6 billion offer for the London Stock Exchange Group Ltd., in what would be by far his biggest deal.

The timing of the approach to LSE was also notable. The surprise move was aimed at disrupting another deal that would effectively put the LSE out of bounds. But given shifting political winds, the exchange could also find in the future that it encounters a frostier reception in the West.

The 58-year-old Mr. Li is a voluble former lawyer, banker, journalist and oil worker. For much of his decadelong tenure as chief executive of Hong Kong Exchanges & Clearing Ltd., he has focused on building closer ties between the exchange and its mainland Chinese counterparts, staking its growth on China's increasing wealth and global influence.

On Wednesday, Mr. Li sought to sell the media on the benefits of uniting the Hong Kong and London exchanges into a group with an 18-hour trading day, in a deal that would help deepen the connections between China and global markets.

Speaking from a London office a few minutes' walk from the LSE's headquarters, he admitted to admiring LSE for months and described the saga as a corporate "Romeo and Juliet" story -- a typically colorful turn of phrase.

"He's a very successful salesman," said Christopher Cheung Wah-fung, a lawmaker in Hong Kong who represents the financial-services sector and is also chief executive of brokerage Christfund Securities. "He always has a bunch of plausible theories to defend his arguments."

HKEX didn't make Mr. Li available for comment.

The LSE proposal, the latest in a long line of mooted deals involving the U.K. exchange, has run immediately into skepticism. "It's a bold move and one that appears to have a low chance of success," said Neil Wilson, an analyst at Safecap Investment Ltd.'s Markets.com.

Mr. Li has spent a decade talking about the opportunities from the two-way internationalization of China's capital markets, and joining forces with LSE could be the biggest step in realizing that vision, according to a person close to him.

One hurdle will be persuading the target's board and shareholders to scrap LSE's existing $14.5 billion deal to buy financial-information provider Refinitiv Holdings Ltd.

Exchange deals are often also fraught with political risk. The U.K. government could veto this deal because LSE forms a critical part of the country's financial infrastructure, according to people familiar with the matter.

Meanwhile, worries are intensifying in Hong Kong financial circles over Beijing's increasing encroachment on the territory, which has helped fuel months of increasingly violent protests. Half of the Hong Kong exchange's board, excluding the CEO, is appointed by the Hong Kong government, which could potentially add to the sensitivity.

HKEX shares fell 3.5% on Thursday as its own investors digested the deal.

Mr. Li got his start as an offshore oil worker in mainland China before entering college. He spent a few years as a journalist working for China Daily, a state mouthpiece, and later earned a master's in journalism at the University of Alabama.

He pivoted again and earned a law degree from Columbia University. He worked at law firms in New York before joining Merrill Lynch China in 1994, becoming its president in 1999. He joined J.P. Morgan China as its chairman in 2003.

Unlike many Western exchanges, HKEX faces little competition in its home market for share trading, futures or clearing, and is thus highly profitable. That means it has felt less pressure than European or U.S. rivals to diversify into areas like compiling indexes, or to gain scale through acquisitions.

The only notable overseas acquisition came in 2012, when it bought the London Metal Exchange for $2.12 billion.

That restraint has paid off so far. Since Mr. Li took the helm in January 2010, the gain in the company's shares has more than doubled that of the benchmark Hang Seng Index. The group has a market value of roughly $38 billion, according to FactSet.

Instead, Mr. Li has focused partly on linking mainland China with global markets. The exchange introduced Stock Connect in 2014, a trading link giving foreign investors access to shares in Shanghai and Shenzhen, and letting mainland investors trade in Hong Kong.

By enabling easier buying and selling of onshore shares, the program helped persuade influential index providers to add Chinese shares to their benchmarks. He has also presided over a similar program called Bond Connect.

The exchange has also moved to stay competitive. It was the world's biggest market for initial public offerings last year. With Mr. Li's support, the city revamped its listing rules in 2018 to allow companies with unequal voting rights and unprofitable biotechnology companies to go public.

However, Mr. Cheung, the lawmaker, said some of Mr. Li's initiatives had yet to pay off. "I can't see any actual benefit for Hong Kong through the LME deal or the efforts to bring back U.S.-listed Chinese tech companies," he said.

Write to Steven Russolillo at steven.russolillo@wsj.com and Stella Yifan Xie at stella.xie@wsj.com

(END) Dow Jones Newswires

September 13, 2019 02:47 ET (06:47 GMT)

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