FINANCE: China’s Chicago Exchange Bid Deserves Serious US Consideration

Bottom line: Washington should seriously consider a ground-breaking plan that would sell the Chicago Stock Exchange to a Chinese buyer, potentially including conditional approval to allay national security concerns.

Chinese buyer bids for Chicago Stock Exchange

China’s outbound M&A passed a new milestone last week when a Chinese investor group announced plans to buy the Chicago Stock Exchange, with an aim to repositioning it as a US listing ground for Chinese companies. The move would mark the first purchase of a US stock exchange by a Chinese buyer, even though the Chicago Stock Exchange is a tiny player compared to the 2 main US boards in New York.

But recent concerns that have threatened several other similar cross-border purchases could come into play, as Washington may worry about opening the nation’s vital capital markets to Chinese ownership. Beijing could also express concerns, since the buyer is a real estate company with little or no experience with financial markets.
The Chicago Stock Exchange surprised many with its announcement that it would be acquired by Casin Group, a Chongqing-based holding company with investments in real estate, and environmental and financial services. (company announcement; English article; Chinese article) No financial terms were given, but the deal would probably cost Casin a relatively modest figure of about $200 million, based on the Chicago Stock Exchange’s small share of just 0.5 percent of the US market for stock trading.

With trading operations in both Chicago and New Jersey, the Chicago Stock Exchange is one of a handful of smaller such stock-trading boards around the US. It offers mostly exchange-traded funds (ETFs) and also futures based on the Chicago Mercantile Exchange (CME), and its name is far less known than the much larger and dominant Nasdaq (Nasdaq: NDAQ) and New York Stock Exchange (NYSE) (NYSE: ICE) boards in New York.

In announcing the deal, the Chicago Stock Exchange said that it aimed to use Casin’s investment as part of a broader plan to transform itself into a market for smaller companies that might not qualify for listings under stricter requirements of the Nasdaq and NYSE. It added that a longer term goal might be to draw on Casin’s connections to become a specialty US listing ground for Chinese companies.

Destined for Scrutiny

As the first-ever sale of a US stock exchange to a Chinese company, the deal is almost certain to draw scrutiny from Washington, where government officials are often wary of China’s lightly supervised financial sector. That wariness has led to slow approval for Chinese banks to purchase and set up US operations, and resulted in a high-profile clash between the US and Chinese stock regulators 3 years ago over access to accounting records for US-listed Chinese companies suspected of fraud and other securities violations.

The deal also comes amid an ongoing national security debate that has seen Washington kill or threaten to derail several high-profile Chinese acquisitions of western companies, mostly from the high-tech sector. The most recent of those came just last month, when Washington vetoed a $3.3 billion plan by Dutch electronics giant Philips (Amsterdam: PHG) to sell its lighting business to a Chinese investor consortium. One of my sources with ties to the regulator that reviews such transactions said that Washington is almost certain to take a careful look at this deal, and may decide to conduct a formal review depending on the deal structure.

At the same time, Beijing might also be concerned about Casin’s inexperience in the complex world of financial markets that are a critical capital-raising tool in all market economies. Similar concerns led China’s powerful state planner to veto a similarly controversial plan in 2009 to sell US truck and SUV maker Hummer to Tengzhong, a maker of heavy industry equipment that was also based in Sichuan and had little or no experience making consumer vehicles.

Such concerns from both Washington and Beijing would both be quite valid, and a veto by either might be justified if they felt such a transaction might create chaos or other dysfunction in US capital markets.

But at the same time, the plan also holds a certain logic for smaller stock exchanges that clearly can’t compete with the big names and are trying to reposition themselves as niche market operators. In this case the creation of a specialty US listing ground for high-growth Chinese companies seeking access to international capital markets could be a viable plan, helping to reverse a recent exodus from New York by Chinese firms that are often too small and scattered to attract attention from US investors.

Accordingly, both Washington and Beijing might also consider the potential for this kind of strategic transformation when making their decisions, and perhaps consider more flexible approaches such as conditional approvals rather than simply vetoing the plan.

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