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The one-year scheme will see Henry Bath issue receipts on LMEshield, a central electronic register for the creation and transfer of off-warrant warehouse receipts.
Receipts will initially be issued for bonded warehouses in Shanghai, with the intention of expanding to other Chinese locations.
The exchange will also work with other warehouse companies and Chinese regulators to facilitate expansion of the initiative once the pilot programme ends. Warehouses that are interested in joining in the expanded scheme at this time are required to have signed up to LMEshield by year-end in order to facilitate the necessary approvals to participate, the LME added.
Garry Jones, LME ceo, said the deal represents a key step in the development of the LMEshield platform, which global commodities players expect to be a “game-changing step” for the global commodities finance industry.
He told Metal Bulletin in an interview that the LME had been looking at China-related warehouse activity for some time, including also expanding the exchange’s network of LMEsword warehouses into the country for the very first time.
“We’ve made some progress – you’re never going to be able to do everything at once but with HKEX as the LME’s owner, we’re working to make sure China benefits too, not just how to make money and benefit ourselves,” he said.
“We’re looking at how we can come up with solutions that also help China to develop. Like most things you have to run pilot programmes – we’re talking about the first phase,” he added.
Shareholders in Henry Bath include Mercuria Energy Group as well as China’s state-owned warehousing operator CMST Development Co Ltd, which has deep local knowledge and regulatory engagement.
Henry Bath has already undertaken the necessary work to ensure that LMEshield can be deployed, having signed in March 2016 a strategic alliance to list warehouses for LMEshield in regions along China’s ‘Belt and Road’ routes.
The ‘Belt and Road’ initiative was launched by the Chinese president in 2013, and aims to create new trading routes between China and around 60 countries in Asia and Europe. The ‘Belt’ part includes countries on the original silk route through Central and West Asia, the Middle East, and Europe, while the ‘Road’ segment compliments it by stimulating infrastructure projects in Southeast Asia, Oceania, and North Africa.
Graham Hawkins, group gm of Henry Bath, said the programme is a “breakthrough moment” and that markets have been calling for LMEshield facilities to open in mainland China.
“China is now established as the lead actor on the world commodities stage and the world wants to do business here. We now have Chinese DNA inside the Henry Bath business and we are proud to be using our unique position to unlock markets for the benefit of everyone,” he added.
LMEshield is designed to improve confidence in global off-warrant warehousing, increase fraud prevention controls, enhance efficiency of transfer of ownership, and support and expand the market for financing of off-warrant commodities.
Its deployment in China is based on the existing LMEshield system, allowing commodities owners and lending banks to hold and finance Chinese commodity receipts as part of their global LMEshield portfolio.
The LME said it is developing a specific set of terms and conditions to reflect the needs of the Chinese market, including provisions to ensure that LMEshield warehouses meet the highest possible standards in respect of security, insurance and inspection. As with all LMEshield jurisdictions, the LME has received a Chinese legal opinion confirming the efficacy of the LMEshield system for commodities in China.
The LMEshield and LMEsword initiatives are running in parallel with a plan by the LME’s parent Hong Kong Exchanges & Clearing (HKEX) to launch a mainland spot commodities trading platform in Qianhai, Shenzhen in the first half of 2017. The initial launch will focus on physically-delivered base metals including aluminium and copper, and will quickly extend into ferrous, energy, rubber and other commodities.
LME ceo Jones said during an interview that the platform was “a real attempt to provide structure in the spot market in commodities,” where a number of small spot commodity exchanges exist but largely without interaction or a central body. HKEX will own the Chinese onshore platform, possibly with some minority partners, he noted.
“Partners in the platform are likely to be industry participants, not exchanges, while various governments that we have been discussing the project with seem positive,” Jones told Metal Bulletin.
“We have already selected the technology provider, hired the CEO and we are significantly ramping up the staff in that area. It will have its own warehouse structure, and the LME will help with that,” he added.