Chinese Peril

China's takeover of the Chicago Stock Exchange would have been a very bad thing
By Gordon G. Chang

Late Thursday, the Securities and Exchange Commission issued a notice announcing it did not approve the proposed acquisition of the 136-year-old Chicago Stock Exchange by a Chinese-led consortium.
The Chicago exchange, better known as CHX, is not happy, saying in a statement the SEC “unfairly” disadvantaged “our company and shareholders.”
The stakes for the rest of America are high. 

As Rep. Robert Pittenger, R-N.C., pointed out before the SEC turned down the deal, a successful takeover would be “the first time a Chinese-owned, state-influenced, firm maintained direct access into the $22 trillion U.S. equity marketplace.”
At the moment at least, Chinese plans are on hold. 

And that, for many reasons, is a good development.
In December 2016, CHX filed a proposed rule change, pursuant to the Securities Exchange Act of 1934, that would allow a group, led by Chongqing Casin Enterprise Group, to acquire the exchange.
The SEC on Thursday blocked the $25 million takeover due to concerns about the ability of the Chicago exchange “to ensure ongoing compliance” with ownership and voting limitations. 

Moreover, the Commission questioned whether “the proposed ownership structure” would allow it “to exercise sufficient oversight” of the exchange.
It’s not hard to see why the SEC reached that conclusion. 

As the Commission’s staff sought more and more information about the deal, the clearer it became that the ties among the acquirers were murky. 

“The information made available to the Commission was insufficient to verify the ultimate source of the funds certain of the proposed upstream owners were using to fund their part of the transaction,” Thursday’s SEC notice states.
The Commission also noted that there were “potential undisclosed connections between purportedly unrelated members of the investor consortium.”
These connections are important because, as the Commission pointed out, “upstream owners” might be able to “exercise undue influence over the Exchange.”
To facilitate approval, three members of the acquisition group dropped out, according to an announcement last November. 

After the change, the remaining Chinese participant, a Casin-owned shell company, held a 29 percent interest in the consortium. 

Said John Kerin, CHX’s CEO, “We are confident this will address any concerns the Commission may have had about the ownership composition.”
Yet the reduction in Chinese ownership did not help. 

The fact that the acquirers did not answer previous questions from the Commission’s staff left the SEC unable to resolve matters relevant to the structure of the proposed acquisition after the trio exited the deal.
Theoretically, the Casin investment group could go back to restructure the deal to get the SEC to give its nod, yet the group’s deceptive responses to the Commission mean that, as a practical matter, it is unlikely to ever win approval.
It’s bad enough that the acquirers apparently tried to mislead the SEC. 

What is even more disturbing, as Fraser Howie, a prominent Asia-based investment analyst, told Fox News, is that Casin’s bid was “odd” to begin with.
For one thing, CHX was not a particularly attractive investment. 

Casin argued it could bring Chinese companies to market in Chicago, yet it’s hard to see how it could do so. 

The identity of owners of an exchange is almost never a factor for companies going public. 

As Andrew Collier of Orient Capital Research in Hong Kong told Fox News, exchange ownership would be relevant only “if the listing company thinks that doing a favor to the owners would pay off.”
As Collier points out, companies selling shares care most about liquidity and valuation. 

The tiny CHX, which handles about 0.5 percent of daily stock trading volume in the U.S, lacks liquidity and would continue to do so.
In the meantime, what happens when another Chinese group comes along to buy CHX? 

The SEC, basing its decision on technical grounds, did not have to consider the broader arguments about Chinese involvement in the U.S. financial system.
Such involvement is not in America’s interests. 

“Why can Chinese companies come and buy U.S. exchanges yet U.S. companies can neither start nor buy Chinese exchanges?” Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” asks. 

`“Reciprocity should be our new mantra.”
There are also concerns about China undermining the U.S. economy. 

“Because any Chinese entity permitted by Beijing to play in foreign markets is effectively controlled by the Chinese government, all such deals, no matter how small or marginal the takeover target seems, enable that government, and the state-dominated Chinese system, to grow its footprint in the U.S. economy,” Alan Tonelson, a Washington, D.C.-based trade expert who blogs at RealityChek, told me. 

That weakens our economy’s “basic free-market structure.”
No Chinese company could demonstrate independence these days due to Beijing’s tightening control, so allowing access to the America’s financial backbone looks exceedingly dangerous. 

Michael Wessel, a long-time commissioner of the U.S.-China Economic and Security Review Commission, tells Fox News that running an American exchange would give China inside information on its markets.
There are three principal dangers that flow from China having that information.

1. First, Beijing could gain technical information about infrastructure weaknesses should it cyberattack the markets.
2. Second, the Chinese could conceivably use their preferential position, inside the backbone, to profitably trade the markets.
3. Third, Chinese ownership could permit Beijing to “breach personal and business data,” as Rep. Pittenger, who has led the charge in Washington against the Casin bid, told Fox.

“Why on earth would we think that allowing them to control a U.S. exchange is in our interest?” Wessel asks.
Casin’s bid to buy CHX is unlikely to be the last Chinese attempt to control an American exchange. The next offer from that country will require Washington to answer, head on, Wessel’s critical question.

Not For Chinese

SEC blocks Chicago Stock Exchange sale to Chinese investors

By John McCrank

The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, U.S., June 24, 2011. 

U.S. regulators on Thursday killed the politically sensitive sale of the Chicago Stock Exchange (CHX) to a group led by China-based investors, saying a lack of information on the would-be buyers threatened the ability to properly monitor the exchange after the deal.
The move by the Securities and Exchange Commission (SEC) ends a two-year battle to gain approval for the sale and underscores the more hostile environment facing Chinese buyers under the administration of U.S. President Donald Trump.
Trump brought the CHX deal up twice during the election campaign as an example of how jobs and wealth were leaving the United States.
SEC staff initially approved the sale of the privately owned exchange in August, but within minutes of the announcement SEC commissioners, led by Chairman Jay Clayton, a Trump appointee, put the decision on hold for further review.
U.S. lawmakers from both parties had harshly criticized the deal in joint letters to the SEC, arguing that it would give the Chinese government access to American financial markets and questioning the SEC’s ability to regulate and monitor foreign owners.
“This has been a long fight, and I am grateful we now have a President who recognizes the national security threats of allowing a Chinese government-affiliated company to own the Chicago Stock Exchange,” Republican Congressman Robert Pittenger said in a statement on Thursday.
“We must continue to be vigilant, with thorough oversight, to prevent the highly-coordinated and strategic efforts of the Communist Chinese government to threaten our national security through malicious business investments.”
CHX is a niche player in the industry, handling just 0.5 percent of U.S. equities trades.
The acquisition, which was proposed in February 2016 and worth around $25 million, was led by Chongqing Casin Enterprise Group, a privately held company that invests in real estate development and financial holdings.
CHX declined to comment on Thursday on the final decision.

UNANSWERED QUESTIONS
The SEC’s decision comes at a time of rising trade tensions between China and the United States.
In the latest signs of friction, Beijing earlier this month launched an anti-dumping investigation into U.S. sorghum shipments following the U.S. Commerce Department’s ‘self-initiated’ dumping probe into Chinese aluminum imports in late November.
The Chinese foreign and commerce ministries did not respond immediately to emailed and faxed questions requesting a comment. 

Friday is Lunar New Year’s day, a public holiday in China.
Casin had said it saw potential in CHX and that its long-term goal was to list Chinese companies in the United States on the bourse. 

It also planned to eventually build an exchange in China using CHX technology.
If the deal had been approved it would have marked the first time Chinese investors had been direct owners of a U.S. stock exchange, although not the first time a U.S. exchange had foreign owners. Deutsche Boerse AG bought the U.S.-based International Securities Exchange for $2.8 billion in 2007, before selling it to Nasdaq Inc for $1.1 billion in 2016.
The CHX deal was approved in December 2016 by the Committee on Foreign Investment in the United States, which scrutinizes deals for potential national security concerns, but also needed SEC approval.
The Wall Street regulator on Thursday did not mention the China connection, but said it found several reasons why the deal did not meet laws governing the ownership of U.S. exchanges, which are stricter than usual ownership rules due to the role they play in the economy.
Critically, the SEC said in a filing posted on its website that it was not satisfied about the source of funds for the deal and who the ultimate consortium owners would be, raising worries the structure of the deal could allow new, unknown entities to assume stakes over time.
The SEC, which conducted its own extensive due diligence when reviewing the case, said that the CHX was not able to provide key information it had requested, including access to the potential owners’ books, “leaving various questions unanswered.”
The CHX’s inability to verify the ultimate potential owners would also make it difficult for the bourse to satisfy its ongoing compliance monitoring obligations, and would obstruct the SEC’s own capacity to oversee CHX, it said.
In particular, the SEC said it was not satisfied it would have full access to the exchange’s books and records if the deal were to go through.

FUTURE IN DOUBT
After a two-year delay, the SEC’s decision puts CHX’s future in doubt. 

The exchange said it needed the infusion of capital to invest in its operations and attract business.
CHX’s other key initiative to boost its volumes centers around giving certain trading firms faster access if they agree to strict trading obligations aimed at making it easier for others to buy and sell stocks on the exchange.
SEC staff approved that plan in October, but the SEC commissioners also put that decision on hold and there is no deadline for a further ruling.
Technically, CHX could still resubmit its proposal or seek other buyers.
CHX competes against the New York Stock Exchange and its three affiliated exchanges, all owned by Intercontinental Exchange Inc, and Nasdaq Inc and Cboe Global Markets Inc, both of which own four U.S. stock exchanges.

Chinese bid to buy Chicago Stock Exchange stirs security fears

“Chinese will employ deceitful practices to gain an unfair advantage in our financial markets through this acquisition,” Sen. Joe Manchin III
By Renae Merle in New York

Old-style bidding in the wheat pit of the Chicago Stock Exchange in January 1920. 

In its heyday, the Chicago Stock Exchange helped introduce big-name American companies such as Marriott and IBM to investors. 

Now the 135-year-old Midwest institution could do the same for Chinese companies, after it agreed to sell itself to a group of investors led by Chongqing Casin Enterprise Group.
The proposed transaction — an attempt to revive the fortunes of the exchange — has stirred fresh debate about foreign takeovers of U.S. corporations.
The $20 million sale, which requires clearance by the Securities and Exchange Commission, has been lambasted by Republicans and Democrats on Capitol Hill, many of whom say it would be risky to sell such a critical part of the U.S. financial market to a foreign investor. 

Allowing China access to a U.S. exchange could pose a risk to national security, critics say.
“An exchange license is a rare commodity,” Rep. Robert Pittenger (R-N.C.) said. 

“It’s about more than the exchange itself.”
The proposed deal, announced in February, has also been blasted by President Trump, who has criticized Chinese trade practices in recent weeks. 

“China bought the Chicago Stock Exchange — China, a Chinese company,” then-candidate Trump said during a presidential debate in South Carolina last year. 

“They are taking our jobs. They are taking our wealth. They are taking our base.”

The old Chicago Stock Exchange Building, built in 1894. It was demolished in 1972, but the main entrance and portions of the original trading floor were preserved at the Art Institute of Chicago. 

The deal is a test of the Trump administration’s resolve to curb the growing influence of the world’s second-largest economy, particularly in U.S. financial markets.
China’s appetite appears to be growing. 

Chinese investors and companies snapped up 171 companies last year in deals worth more than $65 billion, more than triple the 45 acquisitions, worth $5 billion, done in 2010, according to data from the analytics firm Dealogic.
The exchange is not the only ­financial-industry player with a potential Chinese buyer. 

Former White House communications director Anthony Scaramucci is selling his investment firm, SkyBridge Capital, which has $11 billion in assets, to a Chinese firm. 

Some say that deal, like the agreement for the Chicago Stock Exchange, or CHX, could give Chinese firms new access to U.S. financial markets and a map to its most wealthy investors.
“It’s a bit of a coup to get approved to be involved in the U.S. financial sector,” said Derek Scissors, a China specialist at the American Enterprise Institute, a conservative-leaning research organization in Washington. 

“It’s a nice feather in your cap.”
The privately held Chongqing Casin Enterprise Group attempted to introduce himself to a U.S. audience in March with a blog post, “Hello America, We Are the Casin Group.”
“For qualified companies in developing countries that desire a global presence and a listing in a mature market, [the Chicago Stock Exchange] could give them that opportunity under a U.S. regulatory framework,” Jackson Xiao, vice president of Casin Group and chief executive of its U.S. subsidiary, said in the blog post.
“Of course, this is also an investment, and we believe that CHX — with the help of our acquisition group — has enormous potential for growth,” Xiao said. 

“This transaction can provide a link between the capital markets in China and the U.S., the two biggest economies in the world.”
For this article, Casin referred comment to the Chicago Stock Exchange. 

There, officials said the deal would provide their platform with the capital it needs to grow and potentially turn it into an international force, helping small and medium U.S. and Chinese companies offer stock to the public for the first time. 

Without it, the exchange’s future is unclear, industry experts say.
“The goal is, as the Chinese marketplace matures and thousands of Chinese companies want to seek liquidity, they get their accounting in line, we get them to come to us,” said Tony Saliba, who is part of the investment group pitching the deal and an exchange board member. 

“They are going to list in the U.S. or London. Casin gives us in America an advantage.”
The Chicago Stock Exchange was one of dozens of regional exchanges started in the 1880s to help local companies sell their stock to the public and is one of the oldest still open. 

Twenty-five years ago, the exchange trading floor was “vibrant, packed with a lot of people. 

Every firm was represented; it was a competitor,” said Saliba, who traded there in the 1990s. 

“It could provide the personal touch.”
But as stock trading first started to centralize in New York and then digitize, the Chicago institution found itself serving a smaller and smaller part of the market. 

Now, less than 1 percent of stock traded during a day goes through the venue.
“The Chicago Stock Exchange has been an inconsequential player for a really long time. They have been having a difficult time competing with the large incumbents,” said Spencer ­Mindlin, an analyst who focuses on capital markets at the ­research and consulting firm Aite Group.
And now the exchange is facing a different kind of crisis: U.S. companies are going public at the slowest rate in decades, and more of the day-to-day trading is being done in “dark pools,” or private trading platforms, which offer sellers more flexibility but have taken market share from traditional venues like the one in Chicago.
The exchange has spent years attempting to regain market share. 

It recently developed strategies to help investors compete with high-frequency traders, who can buy or sell a stock in less than the blink of an eye, and developed a strategy for assisting companies completing complex financial transactions.
But to rebound, the exchange needs money. 

Its current owners, a consortium of financial firms that include Goldman Sachs, have not invested in the company for years and have asked for an exorbitant price to sell their stake, driving away potential U.S. buyers, according to people familiar with the exchange’s finances who spoke on the condition of anonymity. 

“They have left it to wither on the vine,” one of them said.
To revive itself, the exchange wants to restart its IPO program, which has been dormant for about 10 years. 

For that, it will need millions of dollars to invest in technology, to hire more people and to prove to the SEC that it is has enough capital to safely help a company offer stock to the public, according to people familiar with the plan.
“If this purchase goes through, we will have a brand-new market­place. This would be a bonanza for the United States and good for Chicago,” Saliba said. 

The companies it would attempt to attract are “small potatoes” to the New York Stock Exchange or Nasdaq but could make a solid business for the Chicago Stock Exchange, he said. 

“We would give them a place to have an IPO efficiently and cheaply.”

And while a relic to U.S. investors, the Chicago Stock Exchange potentially offers a lot to a Chinese buyer, industry analysts say. 

It would be an expensive and time-consuming process for a Chinese firm to get regulatory approval to build a U.S. exchange from scratch. 

By buying the Chicago exchange, Casin would bypass that process and could quickly begin offering a venue for small to medium Chinese companies to stage IPOs.
“They are making a large investment,” Saliba said of the Chinese investors. 

“They believe they can get Chinese business over here. Whether we’re successful or not remains to be seen.”
But the deal has stirred strong objections, particularly from critics who question whether the Chinese firms that would trade on the Chicago exchange would be safe investments for U.S. investors. 

The purchase would also give China unprecedented access to the infrastructure of the U.S. financial system, they say.
Exchange officials note that the deal has already been cleared by the Committee on Foreign Investment in the United States, known as CFIUS, which reviews whether such deals pose national security concerns.
But that has not satisfied the critics, who point to China’s history of stealing intellectual property and state-sponsored cyberattacks. 

“I believe it is highly likely that they will employ similar, deceitful practices to gain an unfair advantage in our financial markets through this acquisition,” Sen. Joe Manchin III (D-W.Va.) said in a July letter to the SEC.
CFIUS needs to be improved to account for China’s aggressive push into U.S. markets, said Pittenger, the congressman from North Carolina.
“You have to have trustworthiness in our economic security,” he said. 

“We welcome Chinese investments, but our concern is anything that could have national security implications.”
The deal’s future now lies with the SEC. 

The agency’s staff has recommended approval of the deal, but its commissioners are asking for more information. 

The agency has extended the time the public can weigh in on the deal until Sept. 17.
The ruling could help define the leadership of Jay Clayton, whom Trump nominated to lead the agency. 

As a Wall Street lawyer, he specialized in helping companies tap the financial markets to raise money. Clayton, who declined to comment for this article, served as an adviser to China-based Alibaba Group in 2014 when it raised $25 billion in an IPO, the largest such deal in history.
Since taking the helm at the SEC, he has called for scaling back regulations to allow more companies to go public. 

“We have to reduce the burdens of becoming a public company so that it’s more attractive,” Clayton said during his confirmation hearing in March. 

He has also praised a 2012 law, Jumpstart Our Business Startups Act, that the Chicago Stock Exchange says it wants to tap to help more small companies go public.
“Jay Clayton is a listings guy. He is an IPO guy. That is a big part of his narrative,” Mindlin of Aite Group said. 

“So what could be his objection?”