The germ of one of Donald Tsang Yam-kuen's long-nurtured ideas is about to sprout. Early next year, if things go according to plan, the Hong Kong Mercantile Exchange (HKMEx) will go live.
By offering dealers a futures contract on gold bullion, HKMEx will be fulfilling the chief executive's desire, first expounded in his 2006 policy address, that Hong Kong should open a commodity futures exchange.
Kicking off with a gold contract is a vast improvement over HKMEx's original idea, which was to start trading with a contract on fuel oil: the gungy black stuff used to propel ships, fire power stations and - on the mainland - as a raw material for small independent 'teapot' oil refineries.
Offering a fuel oil contract may have seemed like a good idea at first. But the market is too specialised to attract the financial trading interest needed to sustain an exchange. Previous attempts to launch futures in Dubai and Singapore came to nothing. And with Beijing keen to eliminate excess refining capacity and cut pollution by shutting the teapots, the proposed Hong Kong contract was sure to struggle, too.
Gold is a much better bet. For one thing, the market is on fire right now, thanks largely to fears of US dollar weakness. Yesterday, the price hit a record high of US$1,117.82 an ounce, up an impressive 340 per cent since its August 1999 cyclical low (see the first chart below).
And unlike fuel oil, bullion trading has a long tradition in Hong Kong. With plenty of interest both from end-users of the metal and financial investors, the city is a natural market for the metal.
A lot of the new gold demand is coming from the mainland. Despite overtaking South Africa as the world's largest producer, the mainland still imported 184 tonnes of the metal last year, more than was used by all the jewellers in the United States. According to HKMEx chairman Barry Cheung Chun-yuen, 70 per cent of those imports were shipped through Hong Kong.