SPOTLIGHT: LME sheds are one piece in Shanghai’s free trade jigsaw

Hosting an LME warehouse is only one part of the Shanghai Free Trade Zone's high-stakes project to develop a hub for cross-border trade and services as China's economy opens up.

Hosting an LME warehouse is only one part of the Shanghai Free Trade Zone’s high-stakes project to develop a hub for cross-border trade and services as China’s economy opens up.

The formal strategic plan of the Shanghai Free Trade Zone will be released to the public earliest by the start of August and latest by mid-August, an official familiar with the situation told Metal Bulletin.

The possibility of an LME-approved warehouse in the free trade zone is being keenly watched by metals markets.

But the official stressed that LME warehousing will likely be only a small part of the SHFTZ’s plans, which are being supported at the highest levels of China’s leadership.

“[The SHFTZ is a] new experimental area for foreigners to invest in China. The Chinese government also wants to figure out a new location more similiar to Hong Kong but not exactly same,” he said.

According to a recent report in the South China Morning Post, the zone has received strong backing from Premier Li Keqiang.

He has said he wants to sustain economic growth by moving the country away from dependence on domestic investment and exports, partly by boosting inward investment and developing a bigger service sector.

He and President Xi Jinping are widely expected to pursue policies – such as trade liberalisation and relaxing currency controls – that will make it easier for foreign entities to invest in China and which will be tested in the free trade zone.

“Shanghai Free Trade Zone is to open more industry areas, not industrial areas – to open more service trade areas to the foreign investors, including banking services, professional services, educational services, and also including some part of the likes of LME warehouses,” the source said.

The free-trade zone’s policies will not be “so free” he said adding that “we are not able to copy 100% [from other free-trade zones in market economies]”.

The project has practical and symbolic significance for the reform agenda of Li and Xi, who warned after assuming power that their reforms would face opposition from vested interests.

The South China Morning Post claimed Li has already faced down opposition to some aspects of the SHFTZ plan, including LME warehouses.

When the China Securities Regulatory Commission suggested that proposals related to the setting up of foreign commodities exchanges be withdrawn from the plan, Li’s office reportedly responded in words that could easily have been penned by LME ceo Martin Abbott.

“Setting up futures delivery warehouses in the Shanghai free-trade zone can replace the functions of those warehouses in South Korea’s Busan and Singapore to a very large extent, and the plan can also reduce the trading costs of Chinese enterprises,” the SCMP quoted a memo from Li’s office in reply.

“Commodities trading in the Shanghai free-trade zone will still be considered offshore [trading], so to set up futures delivery warehouses within the zone will not have an impact on domestic futures trading, delivery and pricing system, and it should not have any negative impact on the stability of domestic financial markets,” the memo said.

With China’s top leadership taking special interest in the details of the free trade zone, it’s clearly a project of national importance.

The official familiar with the plans even said that it may be important if and when China seeks to join the Trans-Pacific Partnership (TPP), a proposed trade agreement between eight nations that is under discussion this week at talks in Malaysia.

“At the national level I think it’s a strategic position to open up areas for foreign investors, especially to match the requirements of entry to the TPP,” the official said.

SHFTZ will also be hugely important for Shanghai as a city, as it aims to become a major international financial hub, competing with Singapore, Hong Kong, London and New York.

“I think SHFTZ can let Shanghai people lead economic growth,” the official told Metal Bulletin.

Shivani Singh
Twitter: @ShivaniSingh_MB