Hong Kong Exchanges and Clearing, the operator of the local stock and futures markets, will begin a push this year to establish a commodities trading platform and clearing facility in the city as part of a three-year plan to diversify its income.
The plan comes after HKEx completed its £1.39 billion (HK$17.36 billion) takeover of the London Metal Exchange last month, helping it to branch out into commodities trading and cut its reliance on stock trading and initial public offerings.
HKEx chief Charles Li Xiaojia said 75 per cent of the bourse's revenue came from cash equity and the rest from equity derivatives, making HKEx almost a pure stock market play. He wanted to see stock and commodities each represent about half of income in a few years.
Buying the LME - the world's largest metal exchange - will create a new revenue stream for HKEx. Based on last year's figure, the LME's income is equivalent to about 15 per cent of HKEx's overall annual total.
"Entering fixed income and commodities will allow us to diversify our revenue base," Li said, adding the HKEx's three-year plan emphasised expansion into commodities, yuan products and fixed-income products.
HKEx is under pressure to diversify its income sources as it battles falling turnover and fewer initial public offerings. Total IPO funds raised last year dropped to HK$89.82 billion, down 65.43 per cent from 2011, while the number of new listings fell 36.63 per cent to 64. HKEx dropped in ranking to the world's fourth-largest IPO market last year, after holding the No1 spot from 2009 to 2011. Average daily turnover last year stood at HK$53.85 billion, down 22.77 per cent from 2011.
Under the plan, HKEx will develop commodities trading in Hong Kong in several ways, including setting up a commodities platform to trade some LME products in the city and create new products.
It will also seek ways to allow Hong Kong and mainland investors to trade more easily on the LME in London, while the LME might also add a new Asian trading session. HKEx will also help the LME to set up its own clearing house. It plans to seek mainland regulatory approval to establish a LME-licensed warehouse network on the mainland.
"We need to extract the value that LME can bring to us. As a metaphor, we need to extract US$10 for every US$1 we pay for the LME," Li said.
Christopher Cheung Wah-fung, the legislator for brokers, said HKEx's diversification would help its future profit growth. "However, many local brokers do not have sufficient capital to join LME as members so it would be hard for them to trade LME products. The benefit for the local brokerage community would be limited," he said.
HKEx will encourage more yuan-share and bond listings. At present, there are only 58 yuan product listings that are mainly bonds. Li said that with Beijing internationalising the yuan, there would be more companies issuing yuan shares in coming years and HKEx already had a platform to prepare for that.