China Jitters and the Chicago Stock Exchange (by the Chicago Tribune)
(This originally appeared in The Chicago Tribune)
When it comes to stock market investments, timing is everything. So you have to feel a little bad for John Kerin, CEO of the Chicago Stock Exchange, who’s lined up an exciting deal that faces serious political head winds. He has a chance to expand in the U.S. and take his technology to China. Kerin’s vision: Make the Chicago Stock Exchange a financial services conduit for companies and investors on both sides of the Pacific.
The problem? This is 2016, with a heated election season, and Kerin’s deal involves putting the exchange in the hands of a new ownership group led by Chinese investors. There are many good business reasons for the exchange to sell itself to a Chinese-led group, but regulators and members of Congress are swarming. It’s bad politics these days to speak positively about global trade and investment.
Yet it’s also bad economics to fear globalization. Trade is good for American prosperity. But you wouldn’t know that from listening to the presidential candidates. Donald Trump says America is “losing the trade war,” blaming U.S. job losses on imports. Hillary Clinton turned against free trade to win blue-collar votes.
Suspicions run deeper when a Chinese firm offers to acquire an American one, especially in a sensitive sector of the economy. No question: A transaction that would put a U.S. stock exchange in Chinese hands requires U.S. government scrutiny before approval. It doesn’t take a Hollywood scriptwriter to imagine Chinese hackers infiltrating the Chicago exchange to bring down all of Wall Street.
So let’s, um, take stock of this deal: The Chicago Stock Exchange, a tiny player in the markets, was looking for investment capital to grow in the U.S. The best offer was an acquisition deal from a group led by China’s Chongqing Casin Enterprise Group.
The tie-in with China makes this proposal special. Not only could Chinese companies list on the Chicago exchange, the Chinese-led group wants to export the Chicago technology to create an exchange in Chongqing, one of China’s biggest cities. Add in the eventual possibility of connecting individual Chinese investors with the U.S. markets via the Chicago Stock Exchange. There are 1.4 billion people in China, 120 million of whom have brokerage accounts. That’s a lot of potential customers for the exchange here and the proposed one in Chongqing.
The benefit to both sides isn’t some wacky coincidence: It’s the essence of globalization. Countries and companies specialize in certain industries, invest in each other, compete to make better or cheaper products. Yes, there are winners and losers, but that fear is overblown. In the U.S., most manufacturing job losses are due to productivity gains, not the loss of markets to imports. “If there is no international trade, if there is no cross-border investment, if services, capital, people and good do not cross borders, then it’s less activity for you, it’s less jobs,” said Christine Lagarde, who isn’t on the Nov. 8 ballot. She heads the International Monetary Fund and was warning business leaders at a recent summit how the trade backlash could hurt the world economy.
Nevertheless, members of Congress want to make it tougher for Chinese companies to buy firms here. There’s a U.S. government process in place to vet those deals, involving an examination by the Committee on Foreign Investment in the United States. That body can block a deal on the broad basis of national security. In a letter this month, 16 members of Congress asked the Government Accountability Office to see if CFIUS should toughen its criteria to raise the bar on foreign companies buying American ones. Congress is even worried about Dalian Wanda, a Chinese conglomerate, buying U.S. movie theaters. By the way, that same conglomerate is co-developing a 98-story tower on Wacker Drive, another win for Chicago. And globalization.
We asked Kerin about the cyber-risk of Chinese-led ownership of the Chicago exchange. He’s not worried. He said firewalls, intrusion protections, regulatory oversight and other measures already are in place to protect the financial system. He also muses about hacker tactics. “If the Chinese wanted to infiltrate the U.S. financial system, is this how they would do it? Would they do something this public?”
We won’t speculate. We’ll wait for CFIUS to examine the transaction and assess any risks.
Scrutiny on national security grounds is appropriate. Fear of foreign investment isn’t.
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