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LMEWEEK-HK exchange wants trading link with Shanghai for commodities
October 20, 2014 / 4:11 PM / 3 years ago

LMEWEEK-HK exchange wants trading link with Shanghai for commodities

* HK-Shanghai link for shares due to be launched shortly

* HKEx wants to replicate that for commodities trading

* LME metal contracts seen eventually moving to renminbi (Adds details, quotes, background)

By Eric Onstad and Harpreet Bhal

LONDON, Oct 20 (Reuters) - The Hong Kong stock exchange (HKEx) said it aimed to create a link to trade commodities with mainland China by adapting a share trading system with the Shanghai Stock Exchange that is on the cusp of going live.

No firm date has been announced for the launch of the link between HKEx and the Shanghai exchange, but sources have told Reuters it is due to begin on Oct. 27.

Analysts have hailed the trading scheme as a milestone in the opening up of China’s capital markets, because it allows foreign investors to trade in and out of Chinese stocks in real time.

“If that works and is successfully launched in the coming weeks, there’s no reason not to believe you can replicate that in the commodity space,” HKEx Chief Executive Charles Li said on Monday.

Hong Kong Exchanges and Clearing Ltd took an expensive gamble in December 2012 by paying $2.2 billion to buy the London Metal Exchange (LME) and diversify into commodities.

Expanding into China, which accounts for about 40 percent of global copper demand and similar shares of other metals trade, is a central strategy in making the LME profitable, officials have said.

“If we are able to find a way to replicate Hong Kong Shanghai Stock Connect in commodities, that will be a transformation,” Li told a seminar in London during LME Week, the top annual gathering for the industrial metals sector.

“We have to create a platform in Hong Kong with products the Chinese feel they can appreciate and identify with.”

CHINESE CURRENCY EVENTUALLY

While there are many differences between the Hong Kong and Shanghai markets, the link will make adjustments for 90 percent of them, allowing investors on both sides to carry on trading mostly as usual, Li said.

Eventually, the main industrial metals contracts on the 137-year-old LME will be denominated in the Chinese currency, other speakers said.

Open interest originating from China in global industrial metals markets has surged to about 22 percent from 7 percent in 2006, and it’s likely that share could rise to over 50 percent in coming years, said Michael Camacho, co-head of global commodities at JP Morgan.

“I see no reason why we couldn’t see a critical mass of volume develop in what is the most important local currency,” he said.

Arthur Fan, chief executive of the commodities business of Bank of China International, said the move to trading LME metals in renminbi was inevitable. “It’s not a matter of whether we will see it, but when. It’s a matter of timing.”

HKEx already plans to launch “mini” contracts in copper, aluminium and zinc based in renminbi, but the main LME contracts in dollars still serve as global benchmarks, and it may take time for those to change, said Rebecca Brosnan, head of Asia commodities for HKEx.

The lot size for these contracts will be 5 tonnes, rather than the 25 tonnes that trade on the LME.

The LME’s new clearing house plans to add the Chinese currency as acceptable collateral before the end of the year. (Reporting by Harpreet Bhal and Eric Onstad; Editing by Jason Neely and Jane Baird)

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