Is China set to roar in commodities trading?
Although a huge buyer of commodities, Chinese futures markets don't set prices. London, New York, and Chicago do. A new Hong Kong exchange aims to challenge them.
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It therefore offers a jurisdiction in which contracts can be bought and sold in a transparent manner, and where buyers and sellers can trust the consistency of the underlying rule of law.Skip to next paragraph
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In addition, HKMEx boasts a stable of powerful shareholders including ICBC, the world’s largest bank by market capitalization, and Cosco, China’s largest shipping company. The backing of HKMEx by these Chinese state-owned giants offers the exchange access to enormous sums of capital that will ensure that trading volume remains high, a necessary condition if the exchange is to have any say in price discovery.
The success of HKMEx hinges largely on how well it is able to tap into the huge commodities spree going on in mainland China.
“I think, given the rise and people’s awareness of commodities and natural resources in this part of the world, that it will be an exchange for people in the region to use,” said Andrew Ferguson, CEO of APAC Resources, a Hong Kong-listed natural resources investment and commodities trading company. “I suspect the exchange will be nothing short of a success on the basis of the fact that it’s going to capture a lot of the business which goes on in this corner of the world.”
Whether the exchange can capitalize on its geographic advantage remains a looming question. Other regional exchanges – including those in Tokyo, Singapore, and in mainland China – have failed to challenge the dominance of the incumbent exchanges due to various barriers to entry that include issues of currency, jurisdiction, taxation, and local rules and regulations. HKMEx is betting on the fact that Hong Kong will provide a more viable venue for a dominant exchange.
“The major financial players come here to interface with China, and China comes to Hong Kong to interface with the internationals," said Albert Helmig, president of HKMEx. "So we think this is a leverage scenario.”
Trading volumes have so far averaged around 2,500 contracts per day for the sole product currently on offer: a US dollar-denominated one-kilogram gold futures contract with physical delivery in Hong Kong. Admittedly, this daily volume is minuscule when compared with the overall volumes churned out by exchanges in Chicago and New York, but Mr. Helmig sees this as the starting point for what he hopes will be a sustainable, vibrant market in the long run.
To this end, HKMEx is not wasting any time in rolling out additional products to meet burgeoning Chinese demand for commodities and to boost trading volume, having already indicated that it plans to offer futures in base and precious metals, energy, agriculture, and commodity indices.
Additionally, a launch of yuan-denominated gold futures later this year has already been announced. Trading of the Chinese currency in Hong Kong has exploded since last July when restrictions on its usage and circulation within Hong Kong were removed. “It will make it a lot easier for those trading in China, which is obviously where most of the end consumers are,” said Mr. Ferguson.