Hong Kong Bourse Pushes on with China Metals Trading Hub

Hong Kong Exchanges and Clearing is pushing ahead with plans to start a metals trading platform in southern China, looking to build its commodity business in the world's number two economy.

Qianhai, a new free trade zone near Hong Kong, is set to host the platform for trading metals before stretching into other commodities, pending regulatory approval. 

HKEx bought the London Metal Exchange for $2.2 billion at the peak of the commodities boom back in 2012, and a mainland presence would come after a years-long struggle by the London bourse to break into China.

"We are going to build in Qianhai a platform – it could become an exchange – and there we are going to trade physical commodities, starting with metals," HKEx chief executive Charles Li said at an industry conference in Hong Kong.

The construction of the Qianhai platform would include setting up an IT system, which Li hopes to complete by the end of the first quarter of 2017, as well as starting a network of warehouses.

"Warehousing is not an easy thing to do. It took the LME 150 years to build 700 warehouses globally ... Are we going to build (in China) in five years? That's too long ... Is it possible in one year? We think it's possible and we'll give it a try," Li said.

The bourse does not yet have permission from the Chinese government to start a warehousing network in the country. Under such a system, it would license warehouses operated by logistics providers.

Bankers and brokers said the move could help expand the LME's franchise, but some were concerned that monitoring of commodities underlying receipts would not be rigorous enough if warehouses used were not actually licensed by the LME.

"It's effectively providing receipts for metal that is not in LME warehouses. So it's not clear to us if we would have recourse to that metal. If that can be shown, then we may be interested but it has not been shown yet," said the head of commodities at a Western bank who declined to be named due to company policy.

Li also said the exchange wanted to build base metal pricing benchmarks in China with the aim of developing futures markets in the world's top consumer of commodities.

"We want to be the primary collector, certifier of pricing benchmarks, we either futurise ... in China if we are permitted, or we license it to our domestic partners," Charles Li said, adding the third option would be to list the contracts on its own exchange.