A Through Train Derailed?

Mainland investors want to get their money into foreign markets but the mainland regulators are not of one voice. Only a few months ago, it seemed like a tsunami was about to overwhelm the Hong Kong markets.

Today, the regulators appear cautious and concerned about retail investors.  However, professionally managed money is coming out of the mainland. For example,  Franklin Templeton Funds of California just landed the management of investment funds from Industrial and Commercial Bank of China. Ping An Insurance placed this week a large investment in Fortis Bank of Brussels. Mainland banks may be targeting Standard Chartered of London, as its stock has climbed from HK$ 235.80 on August 21, 2007 to HK$ 290.00 on November 30th during a dismal period for many western banks.  Finally, China Merchants Bank received permission from the Federal Reserve to establish a branch in New York City. .

On the other side of the border there are fewer clouds. The Hong Kong Exchanges and Clearing Limited is creating muscle in its own income statement which fortifies itself and gives it wherewithal to hang onto long term projects. In other words, it is unlikely that it would have to abandon this project if the going gets tough. For example, the exchange is showing how productive it can be.

The majority of the company’s income is tied to "market turnover," which is defined as each transaction’s price times the volume of shares traded in that transaction. So more shares traded at higher prices for the large companies, such as China Telecom, lead to higher "turnover." For the nine months ended September 30, 2007, the income that was affected by "market turnover" doubled. The exchange also receives listing fees, income for the sale of information and investment income. When adding up all income, the top line increased 93% for the nine months of this year. What becomes interesting is to see what happened to the bottom line! Profit attributable to shareholders increased 140%. This happened because the operating expenses only increased 15% and the corporate tax rate was only 14.2% of pretax profits.

During the November 14, 2007 Cato Monetary Conference in Washington, D.C.,  when Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority was asked whether the Shanghai and Hong Kong markets would be coming closer together rather than further apart, he answered the future points towards a coming closer together. 

The Hong Kong Exchanges and Clearing Limited’s earnings progress supports this  hypothesis because the exchange has the muscle to stick to their goals. So in reply to the question, what will happen to "the through train to the Hong Kong?" The answer is: it is most likely to cross the border and not be derailed.

 (Mr. Wilkins is a Chartered Financial Analyst, an investment adviser and author of "Sir Joseph Jekyll and His Impact on Oglethorpe’s Georgia." He and his clients own shares in Hong Kong Exchanges and Clearing Limited.)