Why Hong Kong exchange’s Qianhai metal plan won’t fly without physical delivery
Hong Kong Exchanges and Clearing’s plan to set up a metal trading platform in Qianhai is considered a breakthrough for the local bourse to expand into commodities trading but brokers and metal manufacturers say such a plan would be successful only if it can arrange physical delivery.
HKEX last week announced it will set up a metal trading platform in Qianhai, the special economic zone off Shenzhen. It, however, did not provide any details or a launch time frame.
Clara Chan, vice-chairman and chief executive of metals major Lee Kee Group and a member of the HKEX subsidiary London Metal Exchange, said many manufacturers would be interested to trade in the Qianhai platform provided it has physical delivery.
“The numerous manufacturers on mainland China who use metals for production are now trading on the LME, which has physical delivery. If the HKEX wants to attract these end-users to trade in Qianhai, it is very important for the HKEX to arrange warehouse and physical delivery,” she said.
HKEX spent £1.39 billion (HK$15 billion) in December 2012 to buy the LME in a bid to expand into commodities trading and cut its reliance on equities.
While the LME is already contributing to the HKEX bottom line, the acquisition has not helped HKEX much in commodities trading. The six metal contracts available in Hong Kong at present have very little turnover. The lead and tin contacts have had no trading this year while the aluminium futures on average only has had six contracts traded daily in March. It was 24 for copper and 27 for nickel. The most popular one, zinc, saw an average daily turnover of just 47.
Chan said the six contracts traded in Hong Kong were settled in cash, with no physical delivery, which is why they failed to attract mainland Chinese end-users.
“If the HKEX Qianhai metal platform wants to succeed, it needs to listen to what manufacturers want, such as delivery logistics and warehouse location,” she said.
HKEX chief executive Charles Li Xiaojia said in January that setting up a metals trading platform in mainland China would be a major strategic goal for the exchange in the next three years.
London-based metal firm Metdist head Apurv Bagri last week won shareholders’ vote to join as a director at the HKEX, making him the first one with an LME background to join the board. Bagri had been nominated by the HKEX board for his metals trading expertise.
“As China continues to open as a result of regulatory changes and the internationalisation of the RMB, the importance of global commodities markets to China will unquestionably increase,” Bagri told the South China Morning Post before his election.
“China is the world’s largest consumer and a significant producer of commodities, and the need for price protection is paramount as more mini and micro enterprises, state-owned enterprises and private companies position to hedge on overseas exchanges. HKEX is perfectly positioned to deliver these services, acting as the bridge between the East and the West.”
Lawmaker Christopher Cheung Wah-fung said the HKEX Qianhai platform would bring Hong Kong closer to Qianhai, which offers tax incentives and preferential policies to attract foreign and Hong Kong banks and retailers.
However, Cheung said that until now, mainly commercial banks and retailers have entered Qianhai. No local brokers are allowed there. The Qianhai Authority had earlier announced it would let HSBC, Bank of East Asia and Credit Suisse set up stock broking joint ventures, but is yet to release any timetable.
“We hope the Qianhai HKEX metal platform would allow in Hong Kong brokers. Only by doing so, Qianhai can show it is really open to do business with the world,” Cheung said.
Benny Mau, chairman of Hong Kong Securities Association, said many local stock investors and brokers would be interested in trading commodities in Qianhai.
“Hong Kong investors would be interested in trading anything that can make money. But the end-users on the mainland will do so only if the exchange offers physical delivery,” Mau said.
“However, it would be hard to attract international investors to trade metals in Qianhai as they would be worried about the restrictions and capital controls on the mainland. Many of them have already traded on the LME and would have no great interest to trade in mainland China.”