London Metal Exchange seeks to widen China's access to commodities market

MOUs lack detail but aim to widen Chinese access to commodities market

PUBLISHED : Friday, 23 October, 2015, 12:03am
UPDATED : Friday, 23 October, 2015, 12:03am

A flurry of proposals signed during the state visit of Chinese President Xi Jinping to Britain will potentially give Chinese firms greater access to international commodities markets and allow Chinese traders more influence over global spot prices.

The world's largest trading forum for industrial metals, London Metal Exchange, inked a memorandum of understanding with seven institutions, including Bank of China, Industrial and Commercial Bank of China, and China Merchants Bank, to increase market access while pledging to boost risk management and renminbi internationalisation services.

"This MOU further shows our determination to provide a bridge between China and the rest of the world," said LME chief executive Garry Jones. "We're making it easier for Chinese participants to engage in the LME's price-discovery process."

In a separate agreement, LME and various subsidiaries of its parent firm, Hong Kong Exchanges and Clearing, signed a non-binding MOU to develop a "London-Hong Kong Connect" trading link that, if implemented, would permit Hong Kong Futures Exchange members direct access to LME products.

The connect concept is modelled on an existing scheme that allows equity investors in Hong Kong and China to directly trade stocks cross border without the need to subscribe to a cumbersome quota system.

"By far the largest consumer of metals, it does make sense for Chinese to be involved in price setting," said Caroline Bain, senior commodities economist at Capital Economics in London.

Scant details were revealed of the various MOUs making it difficult to assess their full impact.

Bain, however, said her "gut feeling was negative" as she worries the intraday volatility associated with China's metal markets might migrate to London.

At the moment "I feel the LME acts as a buffer" on Chinese metal prices, Bain said.

China Construction Bank also announced it was buying a 75 per cent stake in LME member Metdisk Trading, making China's second-largest lender the second Chinese-owned company to have floor-dealing rights on LME's open-outcry trading floor.

The deal will help the bank develop its position in the industrial metals and global commodities markets, CCB chairman Wang Hongzhang said.

HKEx bought LME for US$2.2 billion in 2012 though plans to expand into China by setting up LME-operated commodity storage warehouses have so far floundered thanks to local opposition.