Reaction to news of Macau’s plan to open a new stock exchange has been predictable. Hong Kong commentators, accustomed to looking down their noses at the other SAR, have been mostly pointing out blindingly obvious reasons why it will be difficult for Macau to build a RMB-denominated stock exchange. What they are not prepared to consider is that Macau’s plan is unlikely to be for next year, or even the year after that, but is a long-term proposal that is designed to cater to a structural shift in the Chinese economy.
That shift is evident to anyone watching what is going on beyond the Lowu and Lok Ma Chau checkpoints. Or to anyone who may have read the speech by the key Guangdong official who let the cat out of the bag on Saturday.
The math is simple. Guangdong has 45,000 National-Level High-Tech Enterprises, only 1.8% of which are listed. The province needs to – and is ready to – climb the industrial value chain, evidenced by a voracious demand for capital. The Shenzhen Stock Exchange and the Hong Kong Stock Exchange can handle some of this flow. But more equity-raising capacity is needed. Why not put some of this in Macau and, to differentiate it from Hong Kong, make it traded in offshore Renminbi?
There are several reasons why not, it turns out, according to critics polled by SCMP. None of which is insurmountable. Here they are.
- Lack of expertise: Macau doesn’t have anyone – literally, anyone – with the experience to run a stock exchange. Fair enough. However, what this overlooks is that Macau built a world-class gaming industry within a few years of SJM’s monopoly being broken in 2002. The government had no one who knew how to run a casino industry back then, either, because they were all on Stanley Ho’s payroll. But lo and behold, the government soon realised that it just needed the right incentives for foreigners to come in and do it for them.
- Lack of Renminbi deposits: Macau’s cash levels are a fraction of Hong Kong’s. Again, fair enough – but only if you count what the city’s residents have in their bank accounts. Of course Macau’s tiny population isn’t what will support a new exchange. It is the hundreds of billions of RMB-HKD flowing through its casinos that will. Currently, the RMB side of this flow is trapped inside China, sitting on the junkets’ cross-border ledgers as collateral against what they pay out in hard currency in Macau. Will the establishment of the digital RMB enable all this cash to be brought out and kept in Macau? It would change the picture instantly if it did. How much is possibly there? How does upwards of RMB 1 trillion sound? As for banking institutions, Macau has the Bank of China (half of all deposits), ICBC, and … Ant Bank. Who else does it need? WeBank will likely be here soon, and it would be surprising if Ping An were far behind. These guys will knock the pants off HSBC, Citibank, or anyone else who thinks they are indispensable in Hong Kong.
- Lack of laws, law firms, accountants, brokerages, etc: Laws are the harder part, because Portuguese Civil Code isn’t easy to work with, requiring lots of long lunches to understand. But Macau is nothing like it used to be. Lunches end at 2.30, latest, these days. Besides, it may not need to all be done in Portuguese. A hybrid of Portuguese and Chinese law – which will be required the closer Macau gets to 2049 – might do the trick. If the exchange is to have Chinese companies trading stocks in RMB, why not? As for the companies needed to handle the kind of volumes that Hong Kong has, well, many of their bosses are probably looking across the Pearl River Delta right now, wondering whether they should take a trip over soon to see what all the fuss is about. And it’s probably been ages since they were last at Fernando’s.
To be sure, Macau getting a stock exchange is a wild idea. But the longer the protests drag on, the more realistic it sounds. Watch this space.