LME targets commodity alliance with mainland bourses

Exchange chief hopes mainland bourses will go international with tie-up as talks are under way

PUBLISHED : Friday, 25 April, 2014, 12:45am
UPDATED : Friday, 25 April, 2014, 12:45am

High-level talks are under way to deliver seamless access between mainland and international commodities markets, the chief executive of the London Metal Exchange told the South China Morning Post.

"Those conversations are going on - conversations with the Chinese exchanges themselves, Chinese clients, the regulators, the central bank, the government. It's a multi-faceted conversation," Garry Jones, who heads the LME, said on the sidelines of LME Week Asia, an annual gathering of metals industry bigwigs.

The talks have taken place alongside those that saw the announcement earlier this month of a mutual market access scheme, known to the public as the stock through train scheme, for investors in Hong Kong and on the mainland to cross-trade stocks listed in Hong Kong and Shanghai, in effect a liberalisation of capital controls on 550 billion yuan (HK$690 billion). The quota does not have a timeframe.

We’d like to consider cross-listing of products on each other’s exchange

The potential alliance of the LME, owned by Hong Kong Exchanges and Clearing, with the three commodity exchanges in Shanghai, Dalian and Zhengzhou would mean a major step forward for the mainland's commodities markets, which now purely serve domestic investors, to go international. The three exchanges trade metal, energy and agricultural products.

Jones said the approval of the mutual market access scheme for equities had helped smooth discussions over the potential options for opening commodities markets next.

China is the world's biggest consumer of most commodities and Jones has a brief from his HKEx bosses to build the LME into the cornerstone commodities exchange for the mainland.

He said alliances and tie-ups were the most likely way forward.

"We'd like to consider cross-listing of products on each other's exchange. That would be a good start because then we could trade some of our markets against some of their markets," he said, adding that cross-listing and alliances would also give maximum flexibility to potential participants.

Jones said that was one reason why the LME would not go on a drive to recruit new members to join the exchange from the mainland - the traditional way in which exchanges are built - but find the best way to help clients trade.

"I'm not pushing so hard on the members, we need the clients, we need more business, but you don't have to join as a member and could still trade at the LME. We want to give access to as many potential users of the exchange as possible," he said.

China consumes 40 to 45 per cent of the world's industrial metals, but represents only 20 to 25 per cent of the trading of them on exchanges - a business the LME dominates with a market share of about 80 per cent.

"If we can close that gap, that is what we are here for," Jones said. "That's a massive opportunity. That's what we're going after."

On Tuesday, HKEx said it would launch yuan-traded copper, aluminium and zinc contracts and a thermal coal contract to be traded in US dollars on its commodity platform. Chief executive Charles Li Xiaojia said he hoped to see tie-ups with the mainland's commodity exchanges in less than five years.

The new commodity platform is HKEx's latest effort to promote commodity trading in the city and prepare for a tie-up with mainland exchanges through a potential commodity through train scheme.

China is the world's top consumer of copper and leads in the consumption of coal used in power plants, which have churned out choking smog in cities such as Beijing.

Jones told reporters in a briefing that the LME would not launch yuan-denominated products in London because it did not have a pool of yuan as big as that in Hong Kong.

He does not think the HKEx commodity platform conflicts with the LME. "What we are going to do is to increase the global liquidity of commodities trading. There will be different liquidity pools in the two markets."