HKEx plans for spot commodity markets in China would involve physical delivery

[LONDON] Plans by Hong Kong Exchanges and Clearing to create mainland, physically deliverable spot commodity markets are a way of getting the London Metal Exchange's warehousing expertise into China, HKEx Chief Executive Charles Li said on Wednesday.

In its 2016-2018 Strategic Plan released earlier this year HKEx said it would explore the possibility of creating a mechanism for spot commodity trading in China supported by a warehousing and financing platform.

But it was not clear at the time whether the spot contracts would be physically deliverable was not completely clear.

On Wednesday Li said the spot contracts would be physically deliverable and they would allow the exchange "to leverage LME expertise in China".

Li also said Chinese commodity trading was driven by speculators because there were very few physical market users, such as consumers and producers in the market. "We want to fill that gap and that will allow us to build a massive benchmark of physical spot trading," Li told reporters during a HKEx annual results presentation.

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The Strategic Plan highlighted the exchange's intentions "to develop credible and internationally relevant onshore benchmarks that are firmly grounded in the physical market". "We would work with appropriate partners," the plan unveiled in January said. "The platform would be aimed initially at facilitating and aggregating the electronic trading of base metals, underpinned by warehouse receipts, with a view towards facilitating efficient and easy trading, payments, settlement and financing." The LME's long-held ambition to approve warehouses in China, particularly in Shanghai, has been thwarted by powerful local resistance.

The main challenger is the Shanghai Futures Exchange (SHFE), which metal industry sources say is worried about loss of volumes, as LME-registered warehouses in China would encourage locals to use the London exchange instead for trading.


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