LME in talks to set up in China

PUBLISHED : Friday, 01 June, 2012, 12:00am
UPDATED : Friday, 01 June, 2012, 12:00am


The London Metal Exchange (LME) has reopened talks with Chinese authorities to expand its warehouse network to the world's largest consumer of base metals.

The British bourse is hopeful of setting up an efficient arbitrage system with the Shanghai Futures Exchange, which plans to extend the reach of its contracts into the global market.

LME, which handles more than 80 per cent of industrial metals futures worldwide, is optimistic about establishing delivery points in China because the mainland regulator is now showing a 'much more open attitude' towards market liberalisations, said Liz Milan, managing director for LME Asia.

'This time we will make sure that the reasons for having a warehouse in China are much clearer,' she said. 'We get the feeling that this time there is a much more open attitude to discuss the benefits.'

LME attempted to set up warehouses in Shanghai several years ago but the plan was cancelled in 2008 when the Chinese securities regulator made it clear that foreign exchanges' delivery points would not be allowed in the country.

The London exchange is now more bullish about its prospects after Guo Shuqing took the helm of the China Securities Regulatory Commission (CSRC) in late October last year, backing drastic liberalisation of the futures market to bolster the national economy.

The LME has received takeover offers including one from Hong Kong Exchanges and Clearing (HKEx).

HKEx chief executive Charles Li Xiaojia said he was confident of winning the bid to help LME expand to China. Li and IntercontinentalExchange, the two remaining suitors, made presentations to the London bourse's board yesterday.

Milan's remarks followed a statement by Wang Lihua, chairman of the Shanghai exchange, that it would study 'internationalising warehouses' while learning from Western counterparts' experiences in expanding storage sites.

'It will be beneficial if they can do it,' Milan said.

'There is a big opportunity, not a threat, for us as a market to develop in China along with the Shanghai Futures Exchange's ongoing internationalisation.'

She added that it would take some time before LME could officially set up its warehouses in China because various technical issues such as tax and logistics still needed to be addressed.

Establishing offshore warehouses by both the Chinese and London exchanges paves the way for the creation of an arbitrage mechanism that allows traders to profit from the differences in price of a commodity in two markets.

An efficient arbitrage system is expected to increase trade volumes on both exchanges, Milan said.

The Shanghai exchange has pledged to invite foreign investors to participate in the trading of its contracts.

It plans to launch crude oil futures this year.

CSRC chairman Guo is adamant about developing China's futures market because active trading in a mature market provides an efficient platform to reasonably price the commodities.

The regulator has also started simulated trading of government bond futures and is likely to relaunch the contracts soon, after a 17-year hiatus.