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This is the question facing regulators across Asia’s emerging markets. Some of them have recently established exchanges. Others are wondering how to reinvigorate decades-old, lacklustre institutions. No one finds the task easy.

Cambodia and Kazakhstan, in their own ways, face this conundrum. They are both trying to add some life to domestic financial systems that have relied too much on relationship lending, eschewing the real benefits that capital markets offer for pricing and distributing risk.

The Cambodia Securities Exchange, launched in 2011 but almost entirely bereft of deals until now, at least has the distinct benefit of a domestic monopoly, albeit a monopoly in a non-existent market. The Astana International Exchange, established in 2017 but only trading since late 2018, cannot even make this small boast. It is the country’s second stock market, and one of the regular questions its chief faces is how it will compete with its local rival.

The two exchanges are both making admirable efforts, but the truth is they have their work cut out for them. Outside China, Hong Kong and Singapore, few Asian exchanges have changed the landscape of their domestic markets – and all remain sideshows to the big global players.

Vivid illustration

Perhaps the most vivid illustration of the problems facing upstart stock exchanges comes from Hong Kong. Despite months of protests that have threatened to paralyze the business district of Central and have given investors ample reason to flee, Hong Kong’s main board had played host to $57.4 billion of equity capital-raising by the middle of December 2019, thus putting it on track to be the busiest exchange in the world by volume.

This is the power of incumbents. Although trading houses might rise and fall, trading venues tend to be incredibly sticky. London remains the world’s largest foreign exchange market, based on little more than history and a convenient time zone. The growth of exchanges requires a simultaneous growth of local banks, funds, law and accountancy firms and many other companies. Once committed to a market, they are reluctant to move.

The best bet for Asia’s ambitious young exchanges may be mergers, or at the very least cooperation. Either of these could be domestic, especially in the case of the Astana International Exchange, which already counts Nasdaq and the Shanghai Stock Exchange among its shareholders. But the more tempting deals will be tie-ups with the big global exchanges.

The Hong Kong Stock Exchange is an obvious candidate on the buy side. After a $39 billion deal for the London Stock Exchange was rebuffed in October, it is clear Hong Kong has a big war chest. 

Charles Li, its chief executive, would no doubt rather make one big, headline-grabbing bet. But strategic acquisitions of domestic exchanges, bringing his team’s expertise to growth opportunities in far-flung parts of Asia, would be a decent alternative.

The more likely option, of course, is that things muddle on: Hong Kong, Singapore and the Chinese exchanges retain their dominance, the other domestic exchanges flounder in search of small, infrequent deals. Stock exchanges are so important that governments often take a keen interest in them. Unfortunately, that rarely leads to anything but inaction.