HKEx commodity platform in Shenzhen would be a breakthrough, if challenges can be surmounted

Beijing is somewhat open minded on Hong Kong-based exchanges going north, at least in its special economic zones

PUBLISHED : Monday, 25 January, 2016, 11:16am
UPDATED : Monday, 25 January, 2016, 11:16am

First it was the accounting firms and financial companies, and now even Hong Kong Exchanges and Clearing is going north, seeking to open a platform on the mainland to expand its commodities business.

But the local bourse may find the challenges bigger than expected.

A trend that first emerged in the 1990s has seen the Big Four accounting firms, banks and insurance companies set up joint ventures or subsidiaries in mainland markets to capture the many business opportunities on offer there. The odd one out was the Stock Exchange of Hong Kong, now part of HKEx, which lured mainland companies to issue H shares in Hong Kong, starting in 1993, but never had any trading platform on the mainland.

It’s something HKEx, formed in 2000, has also failed to achieve.

It was, therefore, quiet a breakthrough when we heard HKEx chief executive Charles Li Xiaojia on Thursday propose the launch of a commodities trading platform on the mainland, most likely in Shenzhen, as part of its three-year strategic plan.

Li said the mainland commodity futures market was dominated by financial players who were not the end users but who traded commodities futures like financial futures and settled by cash only. The end users, such as manufacturers who needed to settle with the physical metals for use in production, mainly traded in the spot markets and not the futures markets. The mainland commodity futures markets thus had high daily turnovers, because they were dominated by speculators, but had low open interest positions due to a lack of end users who would take a longer-term view and would demand physical delivery at the end of the day.

HKEx, which in 2012 purchased the London Metal Exchange, the world’s biggest metal exchange, says it has the ability to expand on the mainland.

“Specifically, we are exploring the establishment of a spot commodity trading on the mainland supported by warehousing and a financial platform,” Li said when unveiling his blueprint on Thursday, adding that the ideal location would most likely be Shenzhen, just an hour’s drive from Hong Kong.

Will this be a dream too hard to come true? Yes and no.

It definitely won’t be easy Beijing to give HKEx the green light to enter the mainland to set up a trading platform that would compete with mainland exchanges. However, we have already seen the Chinese Gold and Silver Exchange Society win approval to set up a gold-trading platform in Shenzhen’s Qianhai special economic zone. This shows Beijing is somewhat open minded on Hong Kong-based exchanges going north, at least in its special economic zones.

The LME also has the commodities talent to help HKEx establish the mainland platform, with technical support in trading and warehousing.

The day when HKEx opens a trading platform on the mainland is not thus not just empty talk. Let’s wait and watch the progress in the next three years.