The Hong Kong Stock Exchange is the world’s second biggest exchange, measured by its own market capitalisation. Call it the China factor. Yet as the mainland’s own exchanges get bigger, Hong Kong can’t count on winning prize listings forever. It’s time for a plan B.

Once, Hong Kong was the designated destination for IPOs of China’s state-owned companies, because mainland rivals were deemed too small. But now, China wants to develop an international financial centre on the mainland. Even Hong Kong stalwarts such as lenders HSBC  and Standard Chartered  are planning to issue shares over the border. The next big bank to list, Agricultural Bank of China, may eschew Hong Kong altogether.

Hong Kong can’t get away from its Chinese roots. The past few years’ efforts at diversification from the China IPO business have had little success. In 2009, mainland enterprises still accounted for over 82 per cent of the total IPO funds raised. The failure of insurer AIA to go through with a planned listing may cut Hong Kong’s 2009 IPO pipeline in half.

Charles Li, the Hong Kong exchange’s new chief executive — and a mainlander — says the exchange seeks to position itself against competition from London, New York and Shanghai by doing things that others can’t do. A start should be to focus less on initial public offerings, and more on other business.

Derivatives are a promising area. As China’s own capital market deepens, the need for complex products will increase.
The real goldmine, though, could be for Hong Kong to focus on becoming China’s offshore yuan capital. China is keen to push the yuan internationalisation agenda, but progress has been slow, mainly because of lack of investable products.

Trading yuan bonds offshore could be a good start. Then equities priced in yuan could follow.

Hong Kong would need Beijing’s approval, and might have to accept a future without blockbuster IPOs. But better a partner than a rival.