New Shanghai free-trade zone to lead push in futures
Beijing plans to allow foreign commodities exchanges to set up delivery warehouses in a move to challenge Singapore and Korea
George Chen and Enoch Yiu
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Beijing will soon announce a plan to allow foreign commodities exchanges to set up their own futures delivery warehouses in the mainland's first free-trade zone in Shanghai, directly challenging Singapore and South Korea's regional dominance in this business and helping Hong Kong Exchanges and Clearing to expand into commodities trading.
Sources familiar with the situation told the South China Morning Post Premier Li Keqiang had recently signed off on this plan, which would be officially announced in the coming days as part of the detailed new rules for the development of Shanghai's proposed free-trade zone.
In the meantime, the central government would also "gradually approve foreign firms to participate in commodities futures trading" in the free-trade zone that would be established in the Pudong New Area, one of the sources said.
These companies could be experienced commodities futures trading houses that already operated in major global futures markets such as London and Chicago, the source added.
On July 3, the State Council officially approved a plan to launch Shanghai's free-trade zone, which is widely expected to be the country's testing ground for major policy reforms to free up cross-border commodity and capital flows.
The cabinet said in a statement after a meeting chaired by the premier that the free-trade zone would be a snapshot of an "upgraded Chinese economy".
Details on what type of new businesses can be conducted in the zone have not yet been released.
"Having their own futures delivery warehouses in the free-trade zone can help domestic commodities buyers save trading and transport costs. They can then rely less on foreign warehouses, for example, in South Korea's Busan and in Singapore," said one of the sources, who declined to be identified before an official government announcement is made.
Such a policy, if implemented, would be a boost to HKEx's subsidiary London Metal Exchange's big expansion plans in Asia, particularly China.
HKEx completed a £1.39 billion (HK$16 billion) takeover of LME in December last year in a bid to expand into commodities.
LME is the world's largest metal exchange, with a turnover of US$14.5 trillion last year.
The exchange has more than 700 licensed warehouses in 36 locations in 14 countries, mostly in North America, northern Europe and nine Asian markets - including the latest addition last month, Kaohsiung in Taiwan.
However, it has no warehouses in mainland China - the largest producer and consumer of metals such as copper and steel.
Lack of warehouses means many mainland clients who trade at the LME can get physical delivery of metal only from warehouses such as those in Singapore or Kaohsiung, which adds to their transport costs.
HKEx chief executive Charles Li Xiaojia, the man behind the LME acquisition, has said earlier that HKEx would lobby Beijing to allow LME to set up warehouses on the mainland to help cut costs for end users.
"Ideally, the LME would be able to eventually license warehouses in mainland China itself," Li said in his blog on the HKEx website.
"The warehouse network is pivotal for making the futures price converge with the physical price as futures contracts get closer to expiry dates.
"Although only a small percentage of futures contracts are eventually settled in physical delivery, the possibility of physical delivery prevents futures prices from diverging too far from the price of the physical metal."
A source close to HKEx said China had yet to provide details of how overseas exchanges such as LME could apply to set up warehouses on the mainland. As such, HKEx could only wait and watch.
"If China allows LME to set up warehouses in Shanghai, it would be a very positive move for LME and would be a big boost to the commodities development of HKEx," the source said.
An LME spokeswoman said: "The extension of LME's warehouse network into mainland China is an important issue for LME and its members.
"LME and HKEx are working on the initiative with high priority."
LME and other global commodities exchanges often prefer setting up their own warehouses to ensure the delivery point is as close to the consumption and manufacturing destinations as possible.
Given the rising demand of commodities from Asian economies, in particular China, already the world's second-largest economy, exchanges and their traders and clients are increasingly choosing Asian cities in which to locate their warehouses.
Nothing would be closer than one in Shanghai.
For a related story about foreign banks' new short cut to set up business in Shanghai, please read here.