Hong Kong Exchanges & Clearing Ltd. plans to develop yuan-denominated commodities products as the second-largest bourse operator expands into China following its $2.2 billion takeover of the London Metal Exchange.
The bourse would probably start monthly cash-settled metals products denominated in yuan, then move into other commodities and physical settlement, Chief Executive Officer Charles Li said at an LME meeting in Hong Kong. The exchange may increase fees, when allowed to do so, he said today.
Hong Kong Exchanges bought the world’s largest base-metals marketplace in December to enter commodities and plans to push into China, the world’s top user of industrial metals. Hong Kong is home to the biggest offshore pool of the Chinese currency and is able to support trading of metals contracts in yuan, K.C. Chan, the government’s secretary for financial services and the Treasury, told the LME meeting.
“The purpose is to use LME as a catalyst for us to really move rapidly into commodities, and be able to leverage on the massive, accelerated pace of internationalization of China’s market,” Li told Rishaad Salamat in a Bloomberg Television interview today. “The long, bullish outlook for commodities from China is not over at all.”
The Hang Seng Index of equities has dropped 13 percent this year through yesterday amid signs China’s economy is faltering, making Hong Kong the worst performer among developed share markets, according to data compiled by Bloomberg. Stock in the HKEx lost 14 percent through today, ending at HK$114.10 in Hong Kong after losing 1.6 percent. Commodities as tracked by the Standard & Poor’s GSCI Index have declined 5.1 percent.
As diners met over an eight-course Chinese meal at the Convention Hall of Hong Kong Convention and Exhibition Center, Li dressed up as an English footballer with David Beckham’s mask to entertain some 900 guests.
“After spending $2.2 billion for the LME, I cannot afford to hire the real Beckham,” he said on the stage. The menu included sea cucumber, double boiled black chicken soup with mushroom, and fried rice with squid and meats.
The LME, founded more than a century ago above a hat shop in London’s financial district, trades metals including copper, zinc and tin, helping to establish benchmark prices. The HKEx pledged as part of the takeover not to raise fees until 2015.
China accounted for 41 percent of global copper consumption last year, using 8.3 million metric tons, according to data from Barclays Plc. The largest economy after the U.S. accounted for 43 percent of global aluminum demand and 44 percent for lead.
The company will study the potential development of yuan-denominated commodity products for HKEx platforms, Li said yesterday at the signing of a memorandum of understanding with Bank of China Ltd. The bank clears the currency for Hong Kong, Macau and Taiwan and its investment-banking unit became an LME clearing member last year.
LMEClear, the metal bourse’s new clearing house, will be running by September next year, Li said in the interview with Bloomberg Television. Hong Kong Exchanges is working toward building a yuan-denominated product-clearing capability into the system before it begins operation, he said.
“We’re looking at everybody and talking with everybody,” Li told Bloomberg Television, when asked about possible partnerships with mainland exchanges. The company would seek a balance between cooperation and competition, he said.
The central government announced last year plans to deepen cooperation between the commodity-futures markets in Hong Kong and the mainland, said the Hong Kong government’s Chan, according to a prepared copy of his remarks. The purchase of the LME by HKEx was another step in this direction, Chan said.
Hong Kong Exchanges plans to list iron ore, coking coal and agricultural products in yuan that are settled in cash, a spokesman said last week. The mainland yuan-denominated commodities trade was valued at a combined 95.3 trillion yuan ($15.5 trillion) in 2012, which is confined to three Chinese exchanges that restrict foreigners, according to data from the China Futures Exchange Association.
Setting up LME-registered warehouses in China is a long-term aspiration, Li told reporters today. While the LME has a global network of more than 700 registered warehouses for users to hold metals, there is none in the Chinese mainland.