Hong Kong Exchanges and Clearing
HKEX is a geographic arbitrage play masquerading as a stock exchange. Over 80% of its market capitalization comes from mainland Chinese companies, but it exists because capital controls prevent direct international investment in Shanghai/Shenzhen. HKEX's entire value proposition is being the 'Hong Kong hole' in China's capital wall—the Stock Connect programs with Shanghai (2014) and Shenzhen (2016) route ~$500B annual northbound investment through Hong Kong's pipes. The exchange capitulated on dual-class shares in 2018 specifically to attract Alibaba's secondary listing after losing its 2014 IPO to NYSE. CEO Nicolas Aguzin was hired from JPMorgan specifically for Wall Street relationships and China navigation. The Hong Kong government holds 5.9% directly and Hong Kong Monetary Authority's Exchange Fund is among top shareholders. HKEX tried to buy LSE for $39B in 2019 to diversify away from China dependency—the rejection left it fully exposed. National Security Law implementation (2020) added political risk without reducing China dependency.
Power Dynamics
Regulated by Hong Kong Securities and Futures Commission. Listed company on its own exchange. Self-regulatory organization with listing authority. Subject to Hong Kong law which is increasingly influenced by mainland China.
HKEX's actual power derives entirely from geographic positioning—it is the only venue where international capital can access China and Chinese companies can access international capital without full convertibility. Stock Connect quotas and eligibility controlled by mainland regulators (CSRC, SAFE). Any change to China's capital controls (opening or closing) existentially threatens HKEX. Beijing can influence through SFC, Liaison Office pressure, or Hong Kong government shareholding. The NSL (2020) creates chilling effect on exchange governance. HKEX competes with Singapore (SGX) for non-China Asia listings and with Shanghai/Shenzhen for China listings.
- China Securities Regulatory Commission controls Stock Connect quotas and eligibility
- SAFE (State Administration of Foreign Exchange) controls capital flow rules
- Hong Kong SFC approves listing rules and major changes
- Hong Kong government is significant shareholder with political oversight
- Beijing can influence through Liaison Office and NSL framework
- Mainland policy changes can instantly change HKEX's value proposition
- HKEX ↔ Shanghai/Shenzhen exchanges: Stock Connect partners but also competitors for China listings
- HKEX ↔ CSRC: Mainland regulator controls Connect access
- HKEX ↔ HK Government: 5.9% shareholder plus HKMA/Exchange Fund holdings
- HKEX ↔ International investors: Route $500B+ annually through Connect programs
- HKEX ↔ Mainland tech companies: Alibaba, JD, Tencent—major listings and revenue sources
Revenue Structure
Hong Kong Exchanges and Clearing Revenue Sources
- Trading fees 35%
- Stock Connect revenue 25%
- Clearing and settlement 25%
- Listing fees 10%
- Market data 5%
Equity and derivatives trading; highly correlated to China sentiment
Northbound and southbound flow fees; quota-dependent
HKSCC, LME Clear (from London Metal Exchange acquisition)
IPO fees from China tech and traditional companies
Data feeds and connectivity
Extreme China concentration—80%+ of market cap is mainland companies. Stock Connect dependent on Beijing policy (quotas can change, eligibility can tighten). IPO pipeline dried up 2022-2024 as China tech crackdown and US tensions deterred listings. LME acquisition (2012) intended to diversify but nickel crisis (2022) caused reputational damage. NSL creates political/governance uncertainty. Singapore competing for Asia listings.
SGX derives 40% from derivatives with less China exposure. Tokyo SE has domestic Japanese market base. HKEX is uniquely dependent on China access value—no other major exchange has 80%+ concentration in single-country-domiciled companies.
Decision Dynamics at Hong Kong Exchanges and Clearing
Dual-class share rules (2018): From consultation to implementation in under 12 months—extremely fast for structural listing rule change—driven by fear of losing tech IPOs to US.
LME nickel trading resumption (March 2022): After suspending nickel trading and canceling trades, took months to restore normal trading and years to restore market confidence. Still dealing with lawsuits in 2024.
Beijing coordination is ultimate bottleneck. Any initiative touching Stock Connect, capital flows, or politically sensitive areas requires unstated mainland approval. SFC formal approval is secondary to informal Beijing alignment.
Failure Modes of Hong Kong Exchanges and Clearing
- LME nickel crisis (March 2022): Suspended trading, canceled $4B in trades to protect Chinese producer Tsingshan; lawsuits ongoing, market credibility damaged
- Lost Alibaba IPO to NYSE (2014): Refused to allow dual-class shares; Alibaba's $25B IPO went to US, forcing HKEX to reverse policy
- 2019 protests impact: Months of unrest deterred listings and raised political risk perception
- NSL listing departures: Some international companies reconsidered HK presence after 2020 law
- China concentration: 80%+ of market cap; no diversification despite LME acquisition
- Capital control dependency: Entire value proposition depends on China maintaining current partial-opening
- Geopolitical crossfire: US-China tensions create listing risks, sanctions concerns, delisting pressures
- Governance capture: HK government shareholding plus Beijing influence reduces independence
- Dual headquarters loyalty: Must satisfy both international investors and Beijing priorities
China opens capital account (removes controls) → international investors access Shanghai directly → HKEX's intermediary value evaporates → becomes regional exchange. Alternative: US-China decoupling intensifies → ADR delistings don't relist in HK due to sanctions fears → IPO pipeline from China stops → HKEX revenue collapses. Or: Beijing tightens controls on Hong Kong specifically → outflows accelerate → market liquidity crisis.
Biological Parallel
HKEX functions like the Isthmus of Panama before the canal—a narrow land bridge connecting two massive but separate ecosystems (China's closed capital market and international open markets). Just as the isthmus enabled species to migrate between North and South America while maintaining distinct ecosystems on each side, HKEX enables capital to flow between China and international markets while both maintain separate regulatory regimes. The isthmus's value came purely from geographic positioning, not from what it produced itself—same with HKEX. If either landmass disappeared or a canal were built (China fully opens capital account), the isthmus loses its connecting function. Panama's vulnerability to sea level rise mirrors HKEX's vulnerability to policy changes that could 'flood' its geographic advantage.