HKEX to establish national spot metals platform in China early next year, says official

PUBLISHED : Tuesday, 07 June, 2016, 8:06pm
UPDATED : Tuesday, 07 June, 2016, 8:06pm

Hong Kong Exchanges & Clearing, which owns the London Metal Exchange, the world’s largest metals bourse, plans to set up a national platform for spot metals trading in Qianhai, China to tap into the huge need among Chinese companies to diversify raw material supply sources and hedge exposure to price volatility, a top HKEX official said Tuesday.

HKEX is currently building a trading system for the project and will register a company in the Qianhai special economic zone in Shenzhen and hire appropriate talent, said Li Gang, co-head of the market development division for HKEX.

After obtaining regulatory approvals, the platform may start trading in the first half of next year, with some base metals like aluminium and copper among the first list of products to be traded with domestic clients, he said.

“China is a top metals consumer in the world and has numerous domestic spot trading platforms set up by local governments or industries. But they are usually small in size and their turnovers are highly fragmented,” Li said.

China lacks a centralised spot trading platform for commodities
Li Gang, HKEX

There are 1,021 physical trading platforms for commodities in China, while there are only three major commodity futures exchanges in the country – Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange – according to statistics from the China Federation of Logistics and Purchasing.

Turnover for the top 10 physical trading platforms in 2013 was 14.9 trillion yuan (HK$17.6 trillion) compared with turnover of 126.5 trillion yuan for the three futures exchanges.

“China lacks a centralised spot trading platform for commodities,” Li said.

He said the proposed Qianhai spot trading platform will allow Chinese companies, including producers and consumers of commodities, to settle with physical metals for use in production “at appropriate prices” and “in a convenient way”. Meanwhile, companies could use the Qianhai platform to hedge their exposure to fluctuations in prices for the metals.

Li also believes the Qianhai spot trading platform will be a success, as HKEX can use LME’s expertise and experience in China. “We can graft LME’s methods onto the domestic market,” he said.

Li added that the goal of HKEX is to create “an LME-like ecosystem” in China’s commodities market.

In the LME market, participants are mostly producers, consumers and traders. Their transactions account for 75 per cent of global trading volume of non-ferrous metals.

However, China’s commodity futures market is dominated by financial companies that trade in futures and settle in cash only.

“Most of the transactions are short-term speculation, and participants are mostly retail investors and financial speculators,” Li said. “This is not healthy. We hope to establish a commodities trading platform that services the real economy.”