Elephant in the room

Bourses: As the world's major bourses bulk up to create global trading platforms, Hong Kong Exchanges and Clearing stands alone. It is the world's biggest exchange operator by market capitalisation, and its own shares trade at 38 times forward earnings, twice the global average. It could probably have its pick of targets. Yet when it comes to mega-mergers, Hong Kong can afford to bide its time.

Not that Hong Kong can ignore the competitive threat. Mergers between Deutsche Boerse and NYSE Euronext, London and Toronto, and Singapore and Sydney all look designed, in part, to pinch some of Hong Kong's prize listings. Large mining IPOs, and even luxury goods companies like Prada, have started gravitating to where their future customers are: China.

If acquisitions were wanted, Hong Kong has what seems like the ideal currency - a sky-high valuation. Because foreign investors can't directly buy into mainland China stocks, Hong Kong has a near-monopoly position. A slew of innovations like yuan-denominated IPOs and bonds promise to bring more volume into the city. But the share price is punchy, by any standards.

Size also creates a snag. Recent exchange deals have been structured as mergers of equals. Politicians and managers don’t like to see their local exchange come out as the junior partner. Even non-flag carrying exchanges might gulp at the terms: Hong Kong’s equity is worth five times that of NASDAQ, for example.

Still, while other exchanges are tied up in knots, Hong Kong can focus on what it does best: cosying up to the Chinese mainland. It also needs to spruce up its technology which lags behind same-sized rivals while pushing into derivatives and modernising its market practices. While other exchanges talk about 24-hour trading, Hong Kong still closes for two hours over lunch. The crop of mega-mergers might spur faster change. Local tycoon Li Ka-shing already gave another wake-up call when he chose Singapore to list his Hutchison Whampoa shipping business last month. One day China will open its capital markets. For the time being, however, Hong Kong must focus on being top-notch. It can do that without joining the merger frenzy.