Joint Venture New China-Europe Exchange

Deutsche Börse has announced a new joint venture with the Shanghai Stock Exchange and the China Financial Futures Exchange, to be based in Frankfurt. The China Europe International Exchange will enable the selling of new financial instruments.
Passage to China.

The German stock exchange, the Deutsche Börse, has established a joint venture with the Shanghai Stock Exchange and the China Financial Futures Exchange.

The new venture will be called China Europe International Exchange and will be incorporated in Germany, Deutsche Börse said in a statement released on Wednesday. It will start operations in the fourth quarter of this year.

"The cross-border use of RMB is increasing rapidly, and RMB internationalisation has become an important strategy in the process of the opening up of China's economy and financial industry," the company announced.

"To promote such a strategy, a well-functioning market with offshore investment and trading opportunities is crucial."

The new China joint venture aims not only to advance the stock exchange but also to strengthen Frankfurt’s position as a trading center for the Chinese currency, the yuan.

The aim is to develop Chinese financial instruments and sell these to international investors outside of China.

The Shanghai Stock Exchange and Deutsche Börse will both own 40 percent of the joint venture and the remaining 20 percent will be owned by the China Financial Futures Exchange.

The Shanghai Stock Exchange is the leading share trading market in China and the China Financial Futures Exchange is the only stock exchange in China where financial derivatives can be sold.

The goal of the partnership is to sell index licenses for the two Chinese stock exchanges to international financial firms, primarily to asset managers. The buyers would then be able to issue indices for financial products, such as for exchange traded funds (ETFs).

The joint venture will involve the yuan denominated trading of fewer than 10 benchmark products on Deutsche Börse trading platforms, according to The Wall Street Journal.

For Deutsche Börse, Asia is a central building block in its expansion strategy.

The company is currently undergoing a change of leadership. Deutsche Börse's shareholders are hoping that Carsten Kengeter, the chief executive who will take up leadership on June 1, will further boost international business.

At Deutsche Börse's most recent shareholders’ meeting, Joachim Faber,  chairman of the German Stock Exchange Group, gave his support to the course set by the departing chief executive officer, Reto Francioni, who had declared the expansion of business in Asia to be a priority.

According to insiders, by participating in the joint venture, Deutsche Börse hopes to expand its business in China further, Reuters reported.

Deutsche Börse aims to reach its target of annual revenue growth of 5 to 10 percent to 2017 partly through partnerships in China, according to The Wall Street Journal.

The new China joint venture aims not only to advance the stock exchange but also to strengthen Frankfurt’s position as a trading center for the Chinese currency, the yuan.

Frankfurt seeks to become the European hub for the Chinese currency. However, so far many companies still prefer to do their business dealings in the Asian metropolises of Hong Kong or Singapore.

Furthermore, other European locations, like London and Luxemburg, are competing with Frankfurt for the dominant position in yuan trading.

As China is an economic heavyweight, the Chinese currency is in great demand but is only allowed to be traded to a limited extent.

The Chinese government is presently working to liberalize the foreign exchange market, in order for the yuan to be accepted into the International Monetary Fund’s basket of currencies with special drawing rights as quickly as possible. This would promote it up to being a world reserve currency.

To date, the IMF’s synthetic currency is based on the dollar, the euro, the British pound, and the Japanese yen.

 

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Michael Maisch is the associate chief of Handelsblatt's finance desk in Frankfurt. Allison Williams contributed to this article. To contact the author: [email protected]