IT CAN still claim to be the region's financial flagship, boasting the most efficient markets in the region. But the Asian typhoon of 1997-98 uncovered a few rotten timbers in Hong Kong's hull. Last August, for instance, hedge funds attacking its currency's peg to the dollar managed to build up huge positions in both the stock and futures markets. This went unnoticed by supervisors, because the stock and futures exchanges are independent, self-regulating companies that rarely compare data.
Market reforms are slow because the 400-odd mostly small, local brokers (many with just a few hundred clients) that run the Hong Kong Stock Exchange were hurt badly by last year's crash and now resist any change that might further endanger their business. Internet brokers say they cannot make headway because the exchange enforces a minimum commission, to protect members with shopfront brokerages. And in an age of global electronic markets, all buy and sell orders are still entered into the trading system by hand. How quaint.
What better time for a repair job than after a storm? Hong Kong's current market structure, which helped drive a decade-long bull market, arose from reforms that followed the 1987 stockmarket crash. Now the government is taking advantage of the Asian crisis to shake up the system again. The reforms, announced in March, are due to be finalised in September. Details are now emerging from the reports of various committees and working parties. It may not add up to much of a revolution. But one was hardly needed—Hong Kong's markets were already the most open in Asia, as well as among the best regulated. Still, the government argues, reform is needed to safeguard Hong Kong's future as a financial centre.
The government's main aim is in line with a global trend: away from fragmented markets run as cosy brokers' clubs, and towards merged national markets managed by proper shareholder-owned companies. The stock and futures exchanges, and yet another independent entity, the clearing house, will all become one. This will be a commercial business—indeed, a big financial blue-chip that will be listed on the stockmarket. It will presumably reap economies in everything from technology to regulation.
None of this is particularly novel: in recent years Frankfurt's stockmarket, derivatives exchange and clearing house have all been brought under one roof, and Singapore and Australia are planning the same. Exchanges in Australia, Frankfurt, Stockholm and Amsterdam have all shed their mutually owned structure, and some have also become publicly listed companies.
But Hong Kong sees itself as perhaps uniquely under threat. It is hard to put a finger on where the toughest competition to Hong Kong's status as a financial hub will come from. Singapore, Shanghai and Tokyo all present regional threats; New York and London global ones. Wherever the threat appears, it will ride on the back of better, more efficient trading technology.
Although merging trading systems is often the hardest part of merging exchanges, once it is done it should be easier to keep up with global technological trends. As part of the reforms, the stock exchange is setting up an Internet-based trading system, called AMS3, that, when it arrives next year, should do away with the “manual moment” that still exists on the exchange floor.
The stock exchange is also setting up a second board, the growth enterprise market (GEM), that is meant to do for high-tech companies what Nasdaq has done in America—by allowing, for instance, firms to list without the three years of profits that the main board requires. This is far from a surefire winner. In the region, Singapore and Malaysia have already set up similar second boards with, so far, little success. Hong Kong itself has few true high-tech companies, but it is hoping to attract regional ones, especially those from mainland China and Taiwan, where firms are frustrated by local accounting rules that make it hard to reflect the true value of their often vast Chinese operations.
Nasdaq itself may be the toughest competition; it is enjoying growing success in hustling around the region selling listings on its board in America to Asian companies. This week it announced plans for an Internet-based stockmarket in Japan, bringing it closer to 24-hour trading. GEM's boosters, meanwhile, were in Silicon Valley trying, absurdly, to persuade hot Californian Internet start-ups to list their shares in Hong Kong once GEM opens. A little reform is a good thing, but it may have gone to some Hong Kongers' heads.