HKEX pledges physical delivery by Qianhai metals trading platform

Charles Li Xiaojia insists new bourse will be operational next year, but some brokers are still doubtful of its success.

PUBLISHED : Tuesday, 14 June, 2016, 3:41pm
UPDATED : Tuesday, 14 June, 2016, 6:18pm

Hong Kong Exchange and Clearing’s planned metals trading platform in Qianhai, the new free trade zone near Hong Kong, will focus on the spot market and serve the real economy by realising physical delivery of commodities, according to chief executive Charles Li Xiaojia.

In a keynote speech at the opening ceremony of LME Week Asia 2016 on Tuesday morning, Li said China has become the world’s most-vibrant commodities market in recent months.

But he said it is speculative and discourages physical delivery, partly due to high expenses, and is not serving the real economy.

The Chinese phenomenon of massive deposits and scarce investable assets is “not normal”
Charles Li Xiaojia, HKEX chief executive

“The Chinese are saving every single dollar into the banking system, while on the other hand companies in the real economy have to pay over 15 per cent interest for financing to operate — that’s something we intend to address,” he said, describing the phenomenon of massive deposits and scarce investable assets in the mainland, as “not normal”.

HKEX is launching the Qianhai platform next year, and is now busy looking for warehousing and logistics providers, as well as building an IT system, which Li hopes will be ready by the end of the first quarter, 2017.

Both state-owned and private partners are being welcomed by HKEX to participate in the project, Li said, and once launched the trading platform will be seeking cooperation, too, with the country’s three other commodities exchanges, in Shanghai, Dalian and Zhengzhou.

Li expects to base the new platform’s business model on London Metal Exchange, which HKEX acquired four years ago and which focuses more on physical trading.

“But Qianhai must be adapted to suit Chinese market conditions,” he said.

Details of the new bourse’s fee structure, meanwhile, are yet to be revealed.

Clara Chan, chief executive of Lee Kee Group, said its customers, end-users of metals, are expecting to use the platform.

“They are mostly small- and medium-sized manufacturers, based in the Pearl River Delta and other industrial regions of China.

“There is huge potential for physical metals delivery,” Chan said, “but the biggest issue they face is the high cost of getting hold of physical metals, and the time of delivery.”

Chan said it is important that the eventual fee structure and settlement procedures cater to local needs, and is expecting the bourse to consult with end-users in its promotion of the platform.

HKEX’s plans, however, have not met with universal approval in the market.

One executive director of a mainland futures company attending the ceremony, who asked to remain anonymous, said he is yet to be convinced of its merits, and again raised one main concern which has also been voiced by others — its liquidity.

“I am not really positive about the new platform, because I think it is something that should be promoted by mainland regulators, rather than a bourse from outside of the mainland,” he said.

Building warehouses is not hard, he added, but ensuring capital liquidity is, and suggested it may take a long time for HKEX to convince participants to use the platform.

“The regulators do not seem to be interested in this, preferring to protect the interests of the three mainland exchanges.”