Introduction
In recent years, with the development of cross-border stock trading in worldwide, stock exchanges have increasingly been merging in each other. For example, in 2000, Euronext was formed by six European countries' stock exchanges and in 2011 NYSE and Deutsche Börse announced their merger to form a new company. The Australian stock exchange is not an exception. Singapore stock exchange made a $US8.4 billion offer Australia in an effort to merge with ASX last year. The merger agreement would enable the two countries listing companies have opportunity to be invested by the other market's investors directly. But Australian federal government rejected the deal from SGX in April 2011. This essay will critically evaluate both positive and side effects of the merger in two perspectives from politic and economic angles to determine whether the Australian treasurer's decision is correct, and whereupon, a conclusion will be drawn.
It is an undeniable fact that both SGX and ASX have not achieved its regional aspirations or strategic goals. In Asia- Oceania, neither of these two stock exchanges can compete with Tokyo, Shanghai or Hong Kong stock exchange in terms of market capitalization. But the situation would be changed if ASX and SGX merged. It is estimated by World Federation of Exchanges that the combination would result in the second largest listing venue in Asia Pacific with over 2,700 listed companies from over 20 countries, including over 200 listings from Greater China. ASX-SGX will also offer access to world's widest range of Asia Pacific equity, fixed income and commodity derivatives with over 400 contracts from over 10 countries, including Australia, Greater China, India and Japan, and cover a range of commodities including metals, energy and agricultural products.
Australia needs substantial amounts of capital to maintain its prospective. The Australian savings obviously cannot meet the need. Also, IMF forecasts that Asian net savings will double between 2010 and 2015. Therefore, Australia should try its best to absorb of Asian capital flow to invest in it. However, in the past decades, Australia is more likely to see itself as a western or Caucasian country. It seems that Australia is too remote in geographic locations and also not good at building the relationship with Asian countries. John Brogden (2009) noted that Australia not being on the Asian continent diminishes its profile in Asian financial markets. Australian financial markets tend to suffer from low-brand recognition offshore and geographic remoteness. In contrast to Australia, Singapore is much closer to the East, making itself an Asian insider and consequently establishing a tight relationship with China and India in the corporate listings and trading area. Seen from this side, the combination of ASX and SGX could open the windows for the Asian potential investors to directly invest Australian industries, providing Australian economy with the golden opportunity to emerge in the rapidly-growing Asian economy.
Furthermore, Ulf Nielsson (2010) noted that the combination of the stock exchanges will provide the listing company with higher visibility, which leads relatively higher post-merger liquidity resulting from the higher trading volumes. In this case, the merging of these two stock exchanges should primarily benefit Australian listings that would consequently experience the increase in visibility to foreign investors to a larger extent. Another merit in the increased liquidity is that the buyer and seller are able to find each other immediately in the market, and therefore price fluctuations can be limited to a minimum level. Meanwhile, turnover may increase compared with the volume in the absence of foreign exposure. Under both effects, it is possible that Australian capital asset will be evaluated properly in a world scope. This will in turn help Australian economic keep sustainable development on a solid base.
2. Open opportunities for Australian to invest overseas
Secondly, with the emerging of ASX and SGX, the Australian investors can get more opportunities to invest in Asian capital market directly which is expected to continue to grow, with the market capitalisation increasing further.
In the past few decades, Asian countries have experienced a tremendous economic growth. It is likely that Asian economic growth miracle will continue in next few decades. According to Harvard Institute for International Development professor, Steven Radelet, Asia's share in world GDP could well grow to more than half of the world economy from its current level of about 35% during the next thirty years. As a result of the high rate of economic growth, the Asian capital asset would have high potential value for investment. Meanwhile, the phenomenon of Asian technology-intensive industries' rapid development also hints that a large sum of capital is needed. Without SGX, ASX will find it extremely difficult to participate in the investment in Asia. In other words, it will be hard for Australian investors to get the chance to directly purchase the potential capital assets with high rate of returns to get the bonus from the Asian rise.
Put another way, in the modern financial market, information disclosure is the most significant consideration for investors to make decisions. As mentioned above, the investment in Asia probably would bring higher rate of return to Australians. But the higher rate of return probably suggests the higher risk. So the immediate decision making is a key for overseas investors to reduce the risk effectively. However, within the current situation, Australian investors might not be enabled to get access to the accurate information from overseas capital market in a timely manner. Fishel and Grossman (1984) argued that the bigger the market, the more product-information may be easily available. Therefore, the combination of ASX-SGX also could provide Australian with a nice offer again. Cross-listing, the cross-membership and mutual offset arrangements between the two exchanges will enable Australian investors to obtain enhanced profiles of Asia and help ASX listings better exposed to Asia-based investors.
3. Improve the efficiency for the capital market
Thirdly, the combination of ASX and SGX will be beneficial for investor to decrease transaction expenses, and reduces costs of capital.
It is obvious that the merger of ASX and SGX could give rise to a common trading platform which is compatible and effective. Because of the new platform, the need for redundant investment in different trading systems could be eliminated. Stock exchange is an industry with economies of scale which does not increase transaction costs but is more conducive to investor's investment. As the result of the bigger-scale stock exchange, the transaction volume will increase, the bid-ask spread will reduce and liquidity of shares will enhance.
The combination also could reduce the costs of obtaining capital. For example, if one corporation wants to issue shares or bonds in both ASX and SGX, it should submit the application to the two stock exchanges separately at the same time. The corporation needs to spend a lot of administrative costs and time to meet the listing requirements. If two countries' Stock Exchanges merge, the company would only need to meet the requirements of either of the stock exchange, hence greatly reducing the cost of cross-listing and making the merged exchange market more attractive to international corporations.
The side effect
Apart from the investigation in the positive effect of the merger of ASX and SGX, the merger also imposes a negative impact on Australian capital market, especially in political terms. Usually, the Stock Exchange is an important hub of the country's financial activities. Seen from this side, if the country is powerless, or facing the potential bankruptcy risk, the country's stock exchange will not be acquired by other countries easily. So it appeals to emotion as many Australian citizens and politicians can not accept a foreign entity to control Australia stock exchange because of their emotions, which is understandable. By merging with ASX, the Singapore government, which is the controller of the SGX, might get the chance to control the Australian national interests indirectly. Australian Treasurer Wayne Swan demonstrates that the merger is a takeover that would see Australia's financial sector become a subsidiary to a competitor in Asia. Therefore, it is hard for politicians to accept the offer if they are unwilling to lose the support from the citizens who have such concerns.
However, it should be noted that if the merger succeeds, ASX and SGX will still remain separate legal and locally regulated entities. ASX and SGX will continue to use their brands .In other hands, The ASIC and RBA will keep to oversee the Australian part of the ASX-SGX's operation. In other words, it should be emphasised that there is no loss of regulatory authority or oversight of exchange operations in Australia implied by the merger of ASX and SGX.
Unfortunately, the Asian's offer has been rejected out of a concern of the threats to Australian nation interest. Maurice L Newman (2011) noted that it will send negative signals to international investors and listed companies, and confirm many Asian prejudices about Australia's insularity and its Western-centricity. Indeed, it is the culture of bigotry and nationalism that sets up a barrier in front of Australia to use Singapore as a gateway into Asia.
Conclusion
Word Count
1,614To sum up, this essay has shed light on the effect of merger of ASX and SGX. As discussed, it is clearly that Australia capital market will get huge benefits from the merger of the two powerful stock exchanges in a long term such as absorbing more low costly capital, increasing liquidity and turnover, reducing the transaction cost and improving the trading efficiency.
