Thứ Tư, 26 tháng 6, 2013

COLUMN-LME and HKEx plan to grab China"s metal market. Simple really ...




Tue Jun 25, 2013 11:41pm EDT



(Clyde Russell is a Reuters market analyst. The views expressed

are his own.)



By Clyde Russell


HONG KONG, June 26 (Reuters) – It’s no secret that gaining

access to China was the primary reason Hong Kong Exchanges

Clearing (HKEx) bought the London Metal Exchange, but the vision

is a long way from reality.


As is usual with these deals, the theory looks sound.

Putting together the venerable LME with a dynamic Asian company

on China’s doorstep looks like a perfect recipe to enter the

world’s largest metals market, which so far has been largely

closed to foreign traders and investors.


“It sounds simple,” was how Charles Li, the chief executive

of HKEx, put it at the LME Week Asia conference in

Hong Kong on Tuesday.


Li was no doubt trying to add a bit of light relief to his

address, but the scale of the challenge is enormous and its

success will not only depend on how the HKEx goes about it, but

also on factors well beyond the exchange’s control.


The first steps outlined by Li include launching

yuan-denominated, cash-settled metals contracts in Hong Kong,

before an eventual move into other commodities and deliverable

futures.


It sounds like a good start, but the issue is going to be

how to get enough volume to make cash-settled contracts viable.


For metal producers, consumers and traders outside China the

contracts would have to offer some kind of advantage over simply

continuing to use the LME’s deliverable futures.


The HKEx contracts would offer the advantage of being

settled in yuan, but this is a double-edged sword as long as the

yuan isn’t a fully convertible currency and China imposes

capital controls.


In fact, the main problem for any plan to integrate China’s

metals market, or any other commodity market, into the global

system is the issue of yuan convertibility.


While there are signs that the new Chinese leadership is

open to relaxing capital controls, the likelihood is that this

will be a protracted process characterised by a series of small

changes over time.


For yuan-denominated commodity futures, a slow process of

currency reform will make it harder to build up liquidity.


This will especially be the case if China’s reforms to its

capital markets continue to exclude speculative investors, such

as hedge funds.


While the Chinese government may include increased yuan

convertibility in a package of reforms slated for October, it’s

likely that restrictions will remain on hedge funds, and these

would likely to be the last controls to be lifted.



COMPETITION WITH SHANGHAI


There is also the question as whether the Chinese

authorities will be happy to allow HKEx a foothold in trading

commodities on the mainland.


Hong Kong often bills itself as the gateway to China, not

only for its physical proximity but also because of its

Western-style capitalism and legal system.


But it’s also quite likely that the Chinese envisage

Shanghai as the main financial centre when capital controls are

relaxed.


While the LME Week Asia event attracted speakers from

mainland exchanges Dalian Commodity Exchange and Zhengzhou

Commodity Exchange, the Shanghai Futures Exchange (SHFE) was

notable by its absence.


The SHFE already offers metals contracts and has warehouses

as well, and it’s well-placed to capture a slice of the global

metals market once China opens up trading to all comers.


Will there be room for more than one benchmark pricing and

trading platform in China’s metals market?


Possibly, but it will be much harder for HKEx to succeed if

the SHFE also chases the market, and does so with the tacit

approval of the authorities in Beijing.


The main advantage for the HKEx is being able to leverage

off the LME’s existing platform and reputation.


But replicating its success in Asia is far from a given, and

while Hong Kong is a financial centre, commodities trade has

generally been concentrated in fierce regional rival Singapore.


The physical location of an exchange isn’t so much of an

issue. Convincing the trading community to move their business

is a major challenge.


HKEx’s Li entertained the LME Week Asia dinner on Tuesday by

dressing up in soccer strip and wearing a David Beckham mask.


He said that after spending $2.2 billion on buying the LME

last year, he couldn’t afford the services of the world-famous

footballer.


While Li was amusing as Beckham, perhaps he should have worn

a Tom Cruise mask, because what his company is trying to do

appears to resemble Mission Impossible more than it does a

football game.


(Editing by Richard Pullin)




COLUMN-LME and HKEx plan to grab China"s metal market. Simple really ...

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