HKEx's LME bid a lame Trojan Horse of Beijing
Hong Kong Exchanges and Clearing wants to buy the London Metal Exchange in order to diversify its business, but analysts question how the acquisition will really help the city develop its own commodities trading.
SCMP, June 5
Someone has asked the right questions at last. Just how indeed will buying the LME help develop commodities trading here? And why should we bother anyway in a city that has no credentials in commodities? Just what is HKEx boss Charles Li Xiaojia up to here? This is a head-scratcher.
But look at it from a different angle and it starts to make sense.
We begin with the fact that HKEx is a branch of the Hong Kong civil service and has been since the government forced four previous stock exchanges to unify in 1986. The government still has the majority of votes and uses them to get the 'independent' directors it wants.
Then take account of the fact that the big listings on the exchange are all mainland ones now. This is a Hong Kong exchange only because the trading floor (little used these days) is located in Hong Kong and because 500 or so local 'market participants' continue to have the right to front-run real investors.
Next, bear in mind the troubles Beijing has had in making foreign investments. It has built up a foreign reserve cash hoard of US$3.3 trillion and every time it tries to buy something worthwhile with the money, rather than just parking it in United States government war debt, the warning bells start ringing.
'Watch out!' say the local patriots in the target market. 'We've got a big China bull in our shop. Let's push it back out before it does us any harm.'
And every time again, Beijing is then told that it may not take a controlling holding in this or that big mineral firm or trading conglomerate. 'Please, we want your money,' say the local bureaucrats. 'But we don't want any strings attached, particularly as you have so much money that you could buy us out outright.'
The authorities in Beijing understand this kind of thinking because it is, in fact, an accurate reflection of what they have in mind. We are not talking here of sophisticated traders with a deep understanding of how modern markets work. We are talking largely of party hacks who adhere to centuries-old mercantilist theories.
The way they see things is that if they own the world's biggest copper mines, they can dictate how much copper they can take and at what price. If they are stopped from owning these mines they can also achieve their objective by owning the biggest copper trading floor. If you can't buy Rio Tinto, buy the LME.
Only this time they won't bid for it directly. Having learned from experience, they have resolved to be a little craftier and to hide behind someone else. Let's see now, who could that someone else be?
Ah, got it, we'll do it through HKEx. One country, two systems, you see. No one will know it's us. What's more, we already have our man in place. Get yourself up to London and put in a bid, Charles. Pay over the odds if you want. Make HKEx contribute to the good of the Motherland.
It will all go wrong, of course. At the first sign of interference, the business of copper trading will move from London to Chicago and all that HKEx will have for its money is a piece of paper saying it has the right to trade copper. The world has moved on from the days of cornered markets. May party hacks in Beijing ministries begin to appreciate it some day.
I'm not even sure of my guess in the chart of where they want the price of copper. So much copper is apparently held by speculators in China at the moment that driving prices down too quickly could set off another financial crisis.
But I am sure that this LME proposal will do HKEx no favours.