To lure the bull, SGX must look beyond the China shop
THE coming trading link between the Hong Kong and Shanghai bourses has triggered much speculation about the competitive pressure that it could create for the Singapore stock market.
Until the link has been up and running for a while, any predictions on that front are pure speculation. But one key lesson can already be divined: Banking on S-chip listings for growth is no longer a viable strategy for Singapore Exchange (SGX).
The Greater China trading tie-up, known formally as Shanghai-Hong Kong Stock Connect, can be interpreted in a few ways.
The first is that Hong Kong's advantage over Singapore in terms of having access to China is a given. With the proximity - both physical and political - of both markets, Hong Kong will always be the natural first choice for the markets when it comes to accessing China.
The implication is that SGX's strategy in the early to mid-2000s of aggressively courting listings from China will be problematic if continued in the long term. To begin with, SGX will rarely be the first choice for the choicest Chinese listing candidates. Admitting more lower-tier companies may remain an option, but it can raise the risk in the market to uncomfortable levels such that market-imposed discounts are no longer conducive to additional S-chip listings, as the SGX experience has shown.
Going a little further, the new trading link actually suggests that any strategy founded on attracting Chinese listings will be doomed in the long term. Extrapolating from the modest opening up of the Shanghai capital market that is happening in the trading link, the eventual and inevitable result will be a full opening of the Chinese markets to foreign investors. When global investors no longer need proxy access to China, even markets such as Hong Kong will have to find other ways to add value.
This is not to suggest that attracting listings from China will not bring returns, but a strategy that fails to look beyond China and geographies is too myopic.
Certainly, SGX must court companies from many countries, but instead of trying to become a listing destination for companies from certain regions, SGX would be better off developing niche specialties, in terms of industries and structures, that will allow it to court listings from anywhere.
In the same way that Canada and Australia have become known as markets that understand mining, Singapore should try to become the destination of choice for industries such as offshore and marine or commodities, or real estate investment trusts, where it has a head start over other exchanges in Asia.
Such a strategy would also offer potential for meaningful innovation, such as Singapore's success with trust structures. But SGX alone will not be able to make such a strategy work. Developing a deep and sophisticated market that can appreciate niche industries requires growing the pool of institutional investors, heavy investment in the education of retail players, as well as augmenting the pool of capital in the market. The government can help on some of those fronts.
If there is one takeway from the Hong Kong-Shanghai tie-up, let it be this: A market that wants to lure the bull will need to look beyond the China shop.
