Hong Kong Stock Market Retracts Offer to Buy London Exchange

TAIPEI, Taiwan — Hong Kong’s stock exchange will no longer proceed with its nearly $37 billion offer to buy its London competitor, it announced on Tuesday morning, in a setback for the exchange’s long-running effort to build a closer connection to European markets.

The surprise bid was initially presented four weeks ago as a way for the pre-eminent stock markets of Asia and Europe to join forces to provide simpler trading and help bring China, the world’s second-largest economy, more directly into global financial markets. The Hong Kong market said that if the two exchanges combined, they could offer continuous trading for 18 hours a day.

The Hong Kong exchange’s parent company, Hong Kong Exchanges and Clearing, did not say why it had retracted its offer. But the London Stock Exchange Group had rejected the offer within two days, saying it was “simply not credible” and not even a basis for negotiations.

Without a deal, both exchanges — and, by extension, the cities of Hong Kong and London — still face an uncertain future.

For Hong Kong, the deal faltered in part on political concerns. The London Stock Exchange cited the Hong Kong government’s sway over the Asian’s exchange’s parent company as a potential regulatory stumbling block. The territory’s government names a majority of the members of the Hong Kong exchange’s board. Hong Kong law also prevents anyone from acquiring more than 5 percent of the shares in the Hong Kong exchange without the local government’s approval.

More broadly, Hong Kong’s position as a Chinese city that exists outside the mainland’s laws has become increasingly tenuous. Hong Kong has been roiled by four months of increasingly violent protests over the city’s relationship with the mainland, prompted by Beijing’s heavier hand in its affairs. Britain returned Hong Kong to Chinese sovereignty in 1997, but under an arrangement known as one country, two systems, it operates under its own laws and runs its own justice system.

David Webb, a longtime shareholder activist who is a former board member of the Hong Kong exchange, said that it had always been unlikely that a deal would be completed. Various regulators oversee different subsidiaries of the London exchange, and some of these subsidiaries are systemically critical to finance in Britain, such as one that handles interest rate swaps, he said.

The proposed deal “was very unlikely to satisfy all of the different regulators,” Mr. Webb said. He added that British regulators were unlikely to have looked kindly on any bid from a company under a foreign government’s control, and even less likely if that foreign government were part of an authoritarian country like China.

At the same time, neither the Hong Kong government nor Beijing would be likely to agree to give up the Hong Kong government’s influence over the city’s stock market so as to make it easier for the exchange to do overseas deals, Mr. Webb added.

The London exchange has its own tough decisions to make. It has missed out on consolidation among global financial exchanges. Deutsche Börse and the Toronto Stock Exchange both tried and failed to acquire the London exchange in the past decade. The London exchange is gambling that its $27 billion deal for Refinitiv, a financial data company, will help it stay relevant to global investors.

Beyond that, London’s status as a financial capital could face a severe test in the coming weeks if Britain leaves the European Union, especially if the break is sharp or abrupt. London has faced a loss of banking jobs to the Continent as Britain deals with a possible exit from the European Union at the end of this month.

Shares of the Hong Kong exchange’s parent company rose about 2 percent after its announcement. Shares of the London Stock Exchange Group, which rose about 6 percent last month following news of the Hong Kong bid, fell by about the same amount in early trading on Tuesday.