SPOTLIGHT: Rush spells rapid change in metal futures

Will trading metal futures markets be transformed by the liberalisation of financial markets in China more rapidly than anybody expected?

Will trading metal futures markets be transformed by the liberalisation of financial markets in China more rapidly than anybody expected?

The answer could be “yes” if the recent rush of announcements from the Shanghai Futures Exchange and Hong Kong Exchanges & Clearing is anything to go by.

The outline has been clear to those watching carefully since Guo Shuqing took over as chairman of the China Securities Regulatory Commission in October 2011, with the intention of developing China’s financial markets, and reforming their relationships with the international marketplace.

The announcements give shape to what China intends.

The Shanghai Futures Exchange plans to list a crude oil contract tradeable in dollars, and will consider the dual listing of its metal contracts too.

It seeks to increase not only its pricing power in markets in which Chinese companies have at times felt they operate at a disadvantage — witness the recent anger about the backwardated and more highly-priced London Metal Exchange copper market — but also because Guo and influential Chinese economists believe that liberalising futures markets will benefit the economy in wider ways too.

A day later, Hong Kong Exchanges & Clearing (HKEx) said it plans to list yuan futures contracts as soon as the third quarter.

Bear in mind that the Hong Kong Exchange is one of two exchanges bidding to buy the London Metal Exchange, whose members and shareholders look with a mixture of hunger and caution at the potential to develop further businesses trading with and in China.

HKEx’s foreign exchange yuan contracts, which will require delivery of US dollars by the seller and settlement in yuan by the buyer, raise intriguing possibilities.

In the event that the HKEx beats Atlanta-based InterContinental Exchange in the race for the LME, brokers on the world’s largest and oldest metal exchange would be able to trade copper and hedge a yuan exposure simultaneously on the same platform.

Copper prices in China would still trade at a remove, priced in yuan and responding to supply and demand in China.

But, with the contacts and backing of HKEx, the LME could expect to set up warehouses in China sooner rather than later.

The market would then have dollar-denominated prices on the LME, which could be readily settled by delivery in China by users that also had a simple capacity to hedge a yuan exposure.

And all this before you even consider the Hong Kong Mercantile Exchange’s plans to launch dollar-settled, yuan-priced copper futures, and its arguments that what it characterises as HKEx’s monopoly position as a stock exchange and clearer be removed.

Alex Harrison
Twitter: @alexharrison_mb

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