Hong Kong Exchanges and Clearing face tough fight on China commodities connect plan

Hong Kong Exchanges & Clearing (HKEx) is eager to wring value from its US$2.2 billion purchase of the London Metal Exchange but the chances of it emulating in metals its success in connecting with stock traders on the mainland may be slipping away.

Shares in HKEx have risen 65 per cent this year, making it the world’s biggest bourse operator, as volume soared through the stock trading link with Shanghai and a related programme that lets mainland funds buy Hong Kong shares.

But metals are another game: China is speeding up efforts to internationalise its commodity markets all by itself, demand for metals has dwindled and regulatory hurdles are forbidding. The HKEx has had an icy reception from the Shanghai Futures Exchange (ShFE), vital for any commodities link.

"Implementing a ’commodities connect’ is much trickier than with stocks, since you are talking about a physical product with the need to be able to take delivery, as opposed to just a piece of paper," said Arjan van Veen, an analyst at Credit Suisse in Hong Kong.

LME volumes fell 6 per cent last month and it needs new products to boost activity.

Its "mini metals" contracts, one-fifth the size of the main LME contracts and aimed at retail investors, have met a lukewarm response - not a good omen for the more retail-oriented Chinese market.