The operators of the Hong Kong Exchanges are taking steps to enter the index business, toward creating benchmarks of the performance of stocks on mainland China and in emerging markets, such as Russia, Brazil, India and South Africa.

The description of the aborning index business came Friday at an international business conference held by the Hong Kong Trade Development Council at the Mandarin Oriental Hotel in New York City.

"Hong Kong Exchange has agreed in principle to enter into detailed discussions with the Shanghai and Shenzhen stock exchanges with a view to establishing a joint venture,’’ said Lawrence Fok, chief marketing officer, Hong Kong Exchanges and Clearing Limited. "The joint venture's possible areas of business include, but are not limited to, the development of index and other equity derivative products and the compilation of new indexes.”

The delineation of Hong Kong's plans came two days before the start of the annual Super Bowl of Indexing industry conference run by the Information Management Network. That conference started Sunday, Dec. 4, in Phoenix.

The indexes compiled by the joint venture would be focused on stocks on mainland China. Whether international investors would be able to invest in products based on these benchmarks in China’s renminbi only or in Hong Kong dollars or other currency is not clear.

But Fok said that the Hong Kong Exchanges are moving to create a “renminbi equity support facility” that would allow investors “to purchase shares in renminbi even if they don’t have renminbi on hand,’’ he said.

Renminbi is the official currency of the People's Republic of China. Renminbi is legal tender in mainland China, but not in Hong Kong or Macau.

Before 2009, the Chinese government prohibited almost all forms of yuan holdings or transactions by foreign entities. Transactions between Chinese companies and international firms would have to be denominated in US dollars.

In June 2009, China officials announced a pilot scheme where transactions were allowed between businesses in Guangdong and Shanghai and certain counterparties in Hong Kong, Macau and chosen nations.


The three exchange operations have raised proceeds in initial public offerings of stock this year of more than $44 billion, according to Thomson Reuters. By comparison, New York has raised $26 billlion and London $13 billion.

Five of the world’s 10 largest offerings of stock in 2010 came in Hong Kong, Fok noted, and included such international names as Prada, Coach and Samsonite.

All told, $59 billion was raised last year in Hong Kong and, through the end of September, $25 billion. But “if market conditions prevail,” Fok said, the total could exceed $59 billion again this year.

The BRICS index initiative was announced in October at the 51st general meeting of the World Federation of Exchanges in Johannesburg.

The initiative brings together the BM&FBOVESPA from Brazil, MICEX from Russia (currently merging with RTS Exchange), Hong Kong Exchanges and Clearing Limited (HKEx) as the initial China representative and the Johannesburg Stock Exchange (JSE) from South Africa.

The National Stock Exchange of India (NSE) and the BSE Ltd have signed letters of support and will join the alliance after finalizing outstanding requirements.

The seven exchanges represent 9,481 companies with combined market worth of $9 trillion and monthly trading volume of $422 billion.

In August, Hong Kong Exchanges and Clearing Limited said the joint venture with the Shanghai Stock Exchange and the Shenzhen Stock Exchange would be incorporated in Hong Kong.

Fok subsequently said the Hong Kong Exchanges would work with exchanges in India, Brazil, Russia and South Africa to create indexes that would give investors “exposure to the emerging markets block” known as BRICS.

In its first phase, the alliance would create equity indices that be focused on each alliance member’s market, but would be able to be traded on the bourse of each alliance member.

In its second phase, the allies would create equity indices that “combine exposure to equity indices of all alliance members.

in the third phase, the allies would create indices that applied to bonds and other types of securities.

By some measures, the Hong Kong, Shanghai and Shenzhen partnership represents the greatest nexus of capital formation in the world, at this point.

-- This article first appeared on Securities Technology Monitor.