On the 8th of April, the Australian Treasurer, Wayne Swan rejected the proposed merger of the Australian Stock Exchange and the Singapore Stock Exchange. Mr Swan has stated two important considerations in the rejection – the unemployment rate will rise rapidly in Australia and Singapore government control of the ASX. Indeed, the federal government officially blocked the $US8.4 billion deal which was a right decision in terms of the strength and stability of Australia’s financial system. However, other oppositions might say that we just lost a great opportunity to access global capital markets. They believed that we have to move towards globalisation to be more open-minded. It is undeniable that one government decision could be attracted two different views by the members, like everything else; it has its own benefits and harms.
As Mr Swan said that the deal was not right enough to grow Australia’s role as a financial services hub in Asia and therefore it was only be justified if there were very substantial benefits to our nation. He treated the deal as a takeover by SGX, not a merger exchange group as well as the Australia’s financial sector would have become a subsidiary to a competitor in Asia. The consequence of this merger would have breached our principal in maximizing our national interest. He believed that the deal would not provide a gateway to Asian capital flows as SGX has limited flows to the rest of Asia, which is not necessary to enter into SGX financial market at the moment.
According to the rank of the World’s stock Exchanges, the ASX ranks 11th in size in the world with $1.5 trillion worth of listed companies, whereas the SGX ranks 21st at $0.672 trillion – no doubt that is a more than double in trillion dollars. Australia was worried about the capital would have mostly gone to Singapore thereby directly improve their economy and nation interests. Along with the people with highly professionals would also have left Australia for work when those big companies planned to move their headquarters to Singapore.
Since Australia has been facing a lack of professionals in these few years and the unemployment rate is still needed to be further improved. Based on the statistics from Australia Bureau of Statistics, in April the Australia’s unemployment rate was steady at 4.9% – it was down by 0.1% from 5% in the January but the reason behind this was the decrease in full time job and more people are hired in part time only.

With the concern on the sovereignty would have fallen into Singapore, Mr Swan has accepted on advice from Foreign Investment Review Board – believed that not having ‘full regulatory sovereignty’ over the ASX would pose material risks and supervisory issues, particularly in relation to clearing and settlement functions. Australian Securities & investment Commission, the Reserve Bank of Australia and Treasury are neither not willing to pass the sovereignty to Singapore. Mr Swan re-emphasised that the ASX was the sole operator of clearance and settlement systems, unlike the other exchanges around the world and this was a key difference to consider the ordinary regulatory would have been changed although this transaction are likely to have many of the claimed benefits.
Except the negative aspects have mentioned as above, we will look at the advantages behind this merger if it was successfully conducted. The new exchange group – ASX-SGX Limited would become the fifth largest securities exchange in the world by market capitalisation (approximately US$12.3 billion), the second largest listings venue in Asia, and the largest provider of exchange-traded funds (ETFs), derivative products and real estate investment trusts (REITs) in Asia.
There are four aspects regarding to our national interest from ASX-SGX Limited.
With the merge of Singapore exchange, the combined financial market would have become more transparency in the new exchange group. Under the Australia’s rigorous regulations plus the further upcoming international trade agreements would have emerged towards increasing Australia’s presence in world markets, further integration with financial markets in the Asia-Pacific would be a tangible and significant step towards promoting Australia as an Asia-Pacific financial services hub.
Australia’s financial market contains attractive services – a skilled and mobile workforce, political stability, and a sound legal and regulatory framework, plus one of the world’s largest pools of funds under management, a strong banking system and world-class exchange infrastructure. ASX-SGX would help to build a conduit into Asian financial markets to improve financial flows between Australia and Asian, and connect Australia’s funds management industry to fast-growing pools of Asian savings.
ASX-SGX will raise the profile of Australia’s financial markets within Asia and beyond. ASX and SGX have already revealed their intentions to develop a range of new non-A$ products and services, a move that would prove difficult if the exchanges remained separately owned. Cross-listing, cross-membership and mutual offset arrangements between the two exchanges will enable ASX listings to obtain enhanced profile in Asia and better exposure to Asia-based investors.

The second good aspect is the reduced cost of capital in Australia, because ASX-SGX has the potential to increase access to foreign capital and lower the cost of capital through increased scale, liquidity and diversification. In fact, a reliance on foreign capital has been a prominent long-term feature of Australia’s economic development given the limited size of our own capital markets and the dominance of capital-intensive industries, especially mining. We can explain this by analysing Australia’s economic circumstances which includes a reliance on foreign funding that is likely to increase, and to be increasingly affected by developments in China and India – major importers of Australian resources; and domination of foreign capital inflow by short-term bank debt, as Australia’s domestic banks are the major source of debt capital for Australian corporates and individuals.
According to a recent study by Nielsson (2009) which investigated the impact on market liquidity of forming the Euronext exchange, noted that ‘the main motivation for studying liquidity is that it ultimately affects the cost of capital’. Conceptually, the greater the size, liquidity, and reach of an exchange, the more cheaply it can assemble capital from investors, and the better it can match the risk and reward preferences of investors and companies. By taking the dependence of Australia’s economic prosperity on continuing access to foreign capital, any proposal that increases access to and reduces the cost of foreign capital to Australia must be in the national interest.

The third good aspect is regarding to the opportunities for diversification, ASX-SGX will create opportunities for Australian savers to diversify their asset holdings more easily across Asian investments; and for Australian issuers to broaden their sources of capital to include the rapidly growing pool of Asian savings. As Financial Services Council head John Brogden (2010) notes: Asia’s population is 4.2 billion (60% of the world’s population) and is expected to grow by 17% by 2050. Many Asian countries have established pension schemes to help fund the ageing of their populations. Asia will generate much of the world’s wealth over coming years. Consensus forecasts indicate that China and India will grow at double the rate of the rest of the world in the five years to 2015.

In addition, both Australia and Singapore are internationally regarded as safe and strong financial centres and have either complementary benefit to help each other develop a more mature financial market. Comparable vertically integrated business profiles (i.e. offering trading, clearing and settlement services) plus strong legal rights and investor protection mechanisms. ASX is dominated by financial stocks, especially banks, and listed mining companies whereas SGX is dominated by industrial and materials companies, information and communications technology (ICT) stocks, real estate investment trusts (REITs) and financial stocks.

We can continue to explain the above complementary nature of the ASX-SGX transaction by the chart below, which compares the relative strengths of the two exchange groups. The merged group will have a more balanced profile than either ASX or SGX separately, with flow-on implications for market risk.

The chart shows that Bond trading is far more established on SGX than ASX, with the value of bond trading on SGX more than 15 times that on ASX in 2009 (WFE 2009). ASX has a wider array of derivative products available to market participants compared to SGX. However, SGX offers a suite of regional index futures contracts covering the Chinese, Japanese and Indian markets, whereas ASX lists only one domestic stock index futures contract (based on the S&P/ASX 200 index).
Through the broader diversification, ASX-SGX builds a conduit between the two complementary exchanges and opens opportunities for participants in both markets to broaden their horizons that lead to diminish ‘home country biases in a good way.
Overall, the reasons behind this rejection merger of the ASX and SGX are worth to be considerable as this is such a big decision throughout the economic benefits all over Australia. However, with the rapid development in economy, I personally believe that it is wiser to corporate with another country towards globalisation. No matter we have this thought or not, the world is going to head down that path. It is rather to be of a relevant size than to hold sovereignty by itself. Although we are unknown to what happen after this merge, we gain the reputation of the world as being open for foreign investment. Therefore, we cannot judge this move is totally bad in terms of Australia’s national interest; the positive outcome of the move probably will lead to a win-win situation for Australia and Singapore in the future.

Bibliography
Access Economics Report on ASX-SGX Combination, http://www.asiaetrading.com/access-economics-report-on-asx-sgx-combination/
ASX could end up a 'wallflower', http://www.adelaidenow.com.au/business/future-of-foreign-cash-shaken-by-swan/story-e6frede3-1226036648308
Australia's Unemployment Rate Steady at 4.9% in April, http://www.tradingeconomics.com/australia/unemployment-rate
ASX-SGX: why the combination is in Australia’s national interest, http://www.asxgroup.com.au/media/PDFs/20101206_ASX_SGX__AccessReport.pdf
Sovereign state of alarm, http://www.couriermail.com.au/ipad/swan-rejects-bid-for-asx/story-fn6ck2gb-1226036201105
Swan right to reject Singapore takeover of ASX, http://www.theaustralian.com.au/business/opinion/swan-right-to-reject-singapore-takeover-of-asx/story-e6frg9if-1226037469640
Swan vetoes ASX takeover, http://www.abc.net.au/news/stories/2011/04/08/3185751.htm
Treasurer Wayne Swan blocks $8.4b ASX takeover, http://www.perthnow.com.au/business/news/treasurer-wayne-swan-blocks-84b-asx-takeover/story-e6frg2qu-1226035846347