May 7, 2019 / 2:24 AM / 15 days ago

Hong Kong exchange plans China metals expansion with warehouse plan

HONG KONG (Reuters) - Hong Kong stock exchange Chief Executive Charles Li said on Tuesday the bourse was in official talks with Guangdong authorities on metals warehousing, a major step towards its long-held ambition to expand in mainland China.

Li, head of Hong Kong Exchanges and Clearing Ltd (HKEX), has long wanted a China warehousing foothold to boost its London Metal Exchange (LME) franchise, but faced reluctance from Chinese regulators concerned with protecting emerging domestic exchanges in the world’s biggest metals consumer.

“We have been talking about LME warehousing in China, it’s not going to be an easy subject,” Li said at an event in Hong Kong. “We are working with the Guangdong government (to see) if we can experiment a pilot scheme for warehousing.”

Warehouses are a critical part of the LME’s price-setting function because it acts as a market of last resort; a place of storage for sellers in need; and a store of metal for buyers in a mechanism that roots exchange prices in the physical market.

The plan involving Guangdong, a province in southern China, would come under the country’s Greater Bay Area project, Li said. The project aims to better integrate the economies of Guangdong and Hong Kong, spurring growth in both regions.

“I can’t give you any details because this is all just political maneuvering,” Li told Reuters in an interview, adding that one way forward would be to say the rules need to be changed, but that would not be “productive”.

“But we are going to say this is (in) the Greater Bay Area (which should mean) increased collaboration between financial institutions and physical users and we will see how far we go.”

The bourse still requires consent from regulators to go ahead with the pilot plan, Li added.

The exchange also plans to expand products under its mainland spot physical exchange, the Qianhai Mercantile Exchange (QME), by adding aluminum ingots and aluminum T-bars in the third quarter, and copper probably next year, Li added.

“Qianhai will continue the value chain from alumina to aluminum and T-bars. Those will be licensed to us here in Hong Kong and then we will launch futures prices based on those spot prices (discovered on QME),” Li said.

“It terms of futurising it, it may be early next year.”

It will continue to look at cross-listing or clearing products from other commodity exchanges, he said.

In London, the LME will make a “very significant” multi-million-dollar investment to modernize its options offerings towards screen-based trade from the telephone interbank market, London Metal Exchange Chief Executive Matt Chamberlain said. He didn’t specify how much money the LME would invest.

The telephone market supports LME volumes on the exchange’s ring, one of the world’s last open-outcry trading floors.

“Our options (offering) was an interbank telephone trades market but the world is moving on,” Chamberlain said.

HKEX also signed a memorandum of understanding with Shanghai Ganglian E-Commerce, which runs Mysteel, and Wuxi Stainless Steel Exchange to promote development in mutual financial and commodities markets.

The MOUs are aiming to license prices and launch futures contracts in Hong Kong as a next step, Li said.

Reporting by Tom Daly and Shivani Singh in HONG KONG; Writing by Melanie Burton in MELBOURNE; Editing by Kenneth Maxwell, Veronica Brown and Dale Hudson

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