SGX's Competitive Strategy

Today in the Business Times was an interview of SGX's head of listings, Laurence Wong:

'The smart way in dealing with competition is not only to make ourselves better but to really differentiate ourselves so that we deliver things that are difficult for other people to,' Mr Wong told BT.

In view of the competitive market environment, is this the correct strategy for SGX?

China is currently pushing for Shanghai to be its main financial centre, many of the top-tier Chinese companies have listed their shares on the Shanghai bourse. With this natural competitive advantage of the hinterland, Shanghai's stock market is well positioned for growth by concentrating on fund raising of the major companies in China. The combination of geographical proximity and political will gives Shanghai a natural advantage that is very difficult for a player like SGX to assail, so SGX naturally should not aim to bring the large Chinese companies to list on its trading board.

The Hong Kong Exchange also shares the advantage of close proximity to the mainland, as well as the advantage of being a very well developed capital market. As such, the major Chinese companies have also dual-listed on the HK Ex as part of the capital raising. In combination with the entrepreneurial culture of Hong Kongers which have created many local businesses, HK also has a natural advantage compared to Singapore when it comes to securing big business.

Where does that leave SGX? Well, it sounds like SGX is left with the scraps. But that doesn't have to be the case. With Mainland and HK investment bankers going for the big guns, Singapore's investment banking and brokerage community can focus on its comparative advantage by pursuing a differentiation strategy which involves focusing on specific niches. And from the looks of it, SGX has done this. By expanding its REIT market and pursuing second-tier companies in the smaller cities around China, SGX makes itself an attractive destination for companies which may not be able to attract the attention of investors and bankers in Shanghai and Hong Kong. So, as far as this area is concerned, I think SGX has got it right.

An interesting idea would be for SGX to pursue an acquisition of a bourse in China that has a similar competitive position to it, if and when regulations allow and the opportunity presents itself. The Shenzhen stock exchange seems like an interesting option. Of course, if the acquisition opportunity does not materialise, joint venture and cooperative agreements can be seeked. The Shenzhen stock exchange is a second-tier exchange that has lagged its bigger brothers in Shanghai and Hongkong, and has a similar market positioning to SGX in the sense that it seeks smaller companies to list. With this convergence of strategic interests, the Shenzhen bourse would make a very interesting partner for SGX to work with.