HONG KONG (BLOOMBERG) - When Hong Kong Exchanges & Clearing Ltd bought the London Metal Exchange in 2012, the access it offered to the Chinese market was a big plus.
But with questions mounting over Beijing's role in Hong Kong affairs, those ties now represent a threat to HKEX's £29.6 billion (S$50.18 billion) bid for the London Stock Exchange Group Plc.
It's an unfamiliar position for the corporate leaders who have made their drama-free links to Beijing key to their international appeal. Amid the US trade war and scrutiny over China's role in Hong Kong's social unrest, the connections are emerging as a commercial handicap. Further complicating HKEX chief executive officer Charles Li's audacious offer is the US$27 billion deal LSE made in July for data provider Refinitiv. Scrapping that is a condition of HKEX's bid.
"LSE is at the center of Britain's financial market," said Cecelia Zhong, CEO of Guojin Resources Ltd. and a former HKEX executive. "As it is busy focusing on its own data deal right now, the last thing LSE wants to consider is foreign ownership, particularly a Chinese player to control it."
The Hong Kong government, which owns 6 per cent of HKEX, appoints six out of the company's 13 board members, and the city's chief executive - a person appointed by Beijing - picks the company's chairman. The structure means the exchange operator comes under a level of political oversight unusual among other developed market bourses.
Other Hong Kong companies have faced similar challenges even before the protests exploded earlier this year into the biggest crisis in Hong Kong since the city's return to China in 1997.
In November, Australia rejected a A$13 billion (S$12.2 billion) gas project bid by Hong Kong tycoon Victor Li's CK Infrastructure Holdings Ltd, calling it contrary to national interest. The decision followed a torrent of criticism in Australia that Hong Kong companies were just as susceptible to Beijing's influence as those on the mainland. US regulators last year rejected a bid by a Chinese-linked consortium to take over the Chicago Stock Exchange, a deal that then-candidate Donald Trump blasted when it was announced in 2016.
The unrest also put unwelcome pressure on Hong Kong companies, particularly Cathay Pacific Airways Ltd, which faced a heavy backlash from China in the wake of its employees joining protests.
About a month ago, China's civil aviation authority began clamping down on Cathay, prompting the carrier to fire staff and threaten to terminate workers for even supporting the demonstrations - let alone participating in them. Both the airline's chief executive officer and chairman have since announced their resignations.
"What we've seen with the Cathay Pacific example is that there is, whether direct or indirect, influence and pressure on Hong Kong companies, which I think some hoped was not necessarily there," said Fraser Howie, who has two decades of experience in China's financial markets and co-wrote the 2010 book "Red Capitalism."
In a call with reporters on Wednesday, Mr Li was asked about fears over China's influence, and referred to the LME takeover. He recalled comments at the time that the deal would amount to a Chinese takeover - concerns that haven't borne out, he said.
"We do not have Chinese management at all in the London Metal Exchange," he said. "If you walk onto the floor, you will see a quintessential British institution."
HKEX shares fell 3.5 per cent in Hong Kong on Thursday, and were up 0.3 per cent in Friday's premarket. LSE is trading at about 14 per cent below the offer price, highlighting skepticism that a deal will get done. A statement from the London bourse called Wednesday's offer an "unsolicited, preliminary and highly conditional proposal." LSE was set to spurn the offer, people familiar with the matter said.
LSE's effort to complete its purchase of Refinitiv, the business that used to be Thomson Reuters Corp.'s financial and risk unit, is a big reason why HKEX's bid is unlikely to succeed, said Jonas Short, head of the Beijing office at Everbright Sun Hung Kai Securities. Likewise, LSE shareholders including Jupiter Asset Management and Aberdeen Standard Investments indicated they prefer the British bourse's planned takeover of Refinitiv - a strategic move to expand in data that HKEX wants to scrap.
Commercial strategy notwithstanding, the British government has the power to scrap the deal on public-interest grounds. "The London Stock Exchange is a critically important part of the UK financial system, so as you would expect, the government and the regulators will be looking at the details closely," said a spokesperson for the UK government on Wednesday.
Not all acquisitions involve strategic assets. Victor Li's CK Asset Holdings Ltd agreed to pay £2.7 billion for Greene King Plc, which operates more than 2,700 British bars, restaurants and hotels.
Still, Brock Silvers, managing director at Kaiyuan Capital, said the heightened scrutiny on Chinese entities won't recede even after an end to the trade war, and it's almost certain, he said, that HKEX will be viewed as a Chinese company.
"An eventual deal would expose LSE to a variety of Chinese corporates and government entities, and some of those relationships could be highly problematic from political, compliance, or know-your-customer perspectives," he said.