Asia exchange partnerships hindered by FX issues

The chairman of Korea Exchange tells FinanceAsia why cooperation between Asian exchanges is currently difficult to achieve.

Greater collaboration between Asia's different securities exchanges would benefit the long-term development of regional capital markets but right now there are practical difficulties in fostering closer ties.

That is the view of Kyung-soo Choi (pictured), chairman of Korea Exchange, as he spoke to FinanceAsia in an exclusive interview in Hong Kong.

Choi, who took over as chairman of the country’s sole securities exchange in 2013, believes the main obstacle to developing stronger connections between Asian exchanges is the existence of different currencies in these countries.

“While many of the Asian exchanges have proposed plans to strengthen collaboration, currency [differences remain] the biggest hurdle because it affects clearing and settlement, capital flows, as well as foreign exchange reserves,” Choi told FinanceAsia.

Were stocks and bonds to be freely traded among these exchanges, it would imply the free flow of capital between these nations and could result in stronger foreign exchange fluctuations. As it is, Asia's currencies already move in different directions; the value of the Chinese yuan, for example, has roughly shifted between 12 and 20 Japanese yen and between 1,300 and 2,300 Indonesian rupiah over the last five years.

Korea Exchange, or KRX, was in talks last year with the Shanghai Stock Exchange about establishing a mutual stock trading link but the plan failed to materialise partly because the two bourses were unable to resolve the currency issue, Choi said.

“European nations were able to form a unified exchange because they do not have such currency issues,” he said, referring to the formation of Euronext in 2000 through the merger of securities exchanges in Belgium, France, Portugal, and the Netherlands.

The use of a common currency, the euro, also helped by encouraging different monetary and legal systems to converge.

If closer financial trading links are to be fomented in Asia, Choi believes Asia’s securities exchanges and central banks will first also have to address the currency issue and come up with a stringent and effective system to monitor capital flows and hedge forex risks.

THROUGH THE DIFFICULTIES

Although full-scale cooperation is still far from sight, KRX has started to connect with other exchanges by cross-listing products and developing joint indices.

These form part of a broader international expansion strategy, as laid out by Choi when he assumed his role as KRX chairman three years ago.

Taking advantage of its strong derivatives platform, KRX signed an agreement with the Taiwan Stock Exchange late last year to allow the cross-listing of exchange-traded funds. The move enabled Korea to strengthen its W21 trillion ($17.7 billion) ETF market by broadening the investor base for those funds, KRX said in a December statement.

Korea Exchange

Korea and Taiwan are also in talks to launch a joint index that tracks the performance of semiconductor stocks, Choi said. The computer chips industry is of vital importance to the electronic sectors of Korea and Taiwan and companies such as Taiwan Semiconductor Manufacturing and SK Hynix count among their bluest blue-chip companies.

LISTING OF FOREIGN FIRMS

As part of its international expansion strategy, KRX is planning to attract more foreign companies to list in Korea. Since 2013 the bourse has conducted roadshows in Hong Kong, San Jose, and Boston to try to promote itself as a listing platform for foreign companies.

KRX has a diversified investor base that includes retail, institutional, and foreign investors, which could serve as a solid foundation for attracting overseas companies, Choi said.

He told FinanceAsia that he believes technology companies, particularly startups in Asia and the US, could be interested in listing in Korea because of its technologically-savvy investor base, which could potentially value their shares at higher level than other exchanges.

According to KRX data, the average valuation for biotechnology, information technology, and internet gaming stocks in Korea was around 53 times earnings last year. That compares with 37 times for those listed on Nasdaq.

In 2013, KRX launched a venture-driven Korea New Exchange to support the growth of small- and medium-sized enterprises by allowing them to raise funds from angel funds and retail investors.

“[The launch of] KONEX is part of our plan to develop a full-service funding platform that serves businesses from the very early stage of development,” Choi said, adding that the platform could ease their dependence on bank loans.

KONEX's aim is to serve as a springboard for young venture firms, both local and abroad, and to help them to expand their business. KRX’s goal is to assist them to fulfil profitability requirements so that they can relist on the KOSDAQ market within three to four years. 

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