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China Plan to Open Metal Futures to Foreigners to Help LME
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China Plan to Open Metal Futures to Foreigners to Help LME

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China Plan to Open Metal Futures to Foreigners to Help LME

May 31 (Bloomberg) -- The Shanghai Futures Exchange’s plan to open its industrial-metal contracts to foreign investors will benefit other bourses trading similar products, said an official at the London Metal Exchange.

“The more the market opens up, the more it becomes free to use, it will help both parties,” Liz Milan, managing director for LME Asia, said in an interview in Shanghai. “We support it and don’t see it as a threat. It’s an opportunity for all of us.” The LME is the biggest marketplace for industrial metals.

The Shanghai bourse, the second-largest in China, may set up overseas warehouses and let foreigners invest in futures, Chairwoman Wang Lihua said on May 28. She gave no timeframe. The LME, considering a possible takeover, plans to hire more people in Asia and expand its warehouse network into China, Martin Abbott, chief executive officer, said in a Bloomberg Television interview May 4. China is the largest user of metals.

“Any move that engages the largest customers will be beneficial to all,” said Nicholas Zhu, Asia head of macro- commodity research at Australia & New Zealand Banking Group Ltd. “To achieve Shanghai’s ambitious plan, it requires lots of regulatory breakthroughs, which could take quite a long time.”

The Shanghai exchange started last year to allow copper and aluminum delivery to warehouses in free trade zones, where products are exempted from value-added tax and import duties. The city plans to increase metals storage at so-called bonded warehouses by as much as fivefold to boost its role as a trade hub, the Shanghai Free Trade Zones Administration has said.

Asian Warehouses

The LME licenses a network of more than 600 storage sites worldwide where users can deposit metals, with Asian locations in Japan, South Korea, Malaysia and Singapore.

“The power of the Chinese as a major consumer, in terms of their influence on the LME price, is somewhat diluted by not being able to have a warehouse here,” Milan said on May 29. “If there was a warehouse here, then the stock position will be way more transparent for the market, and then that will be priced into the fundamentals.”

Chinese companies have said they would be interested in having an LME warehouse in China, Milan said. The exchange will have to start the due diligence process around the logistics and tax requirements, she said.

While the LME investigated the Shanghai Free Trade Zone a few years ago, the attempt wasn’t successful as the Chinese regulator wasn’t ready for foreign exchanges to have warehouses in China, Milan said. Overseas bourses are prohibited from setting up warehouses for delivery before the government issues rules on the opening of futures markets, the China Securities Regulatory Commission said in a statement July 2008.

Yuan Clearing

The LME opened its first Asian office in Singapore in 2010 and started trading smaller contracts last year in partnership with Singapore Exchange Ltd. It approved a Bank of China Ltd. unit this year as its first Chinese company member. The bourse may offer clearing and settlement in Chinese yuan as part of its new clearing house, planned for release in 2014, said Milan.

The SHFE plans to start trading crude oil futures by the end of this year and open the contracts to foreign investors, Wang said this week. The bourse would “soon” open base metals to foreign investors, said deputy general manager Chu Juehai.

Trading on the exchange declined 50 percent last year to 308.24 million lots from 621.90 million lots in 2010, data from the China Futures Association showed. The bourse trades futures in copper, aluminum, zinc, lead, gold, silver, rubber, fuel oil, steel rebars and wire rods.

Record Contracts

The LME, started 135 years ago above a hat shop in London’s financial district, has received takeover offers at the same time it’s trying to boost revenue with its own clearinghouse and higher fees. The exchange handled a record $15.4 trillion of contracts in copper and other industrial metals last year.

The exchange said this month two parties were continuing discussions about a possible takeover. Hong Kong Exchanges & Clearing Ltd. and IntercontinentalExchange Inc. are the two companies left in the bidding, said two people with direct knowledge of the matter last week. They declined to be identified because the information isn’t public.

Copper for three-month delivery declined as much as 0.7 percent to $7,422.75 a metric ton on the LME today, the lowest since Dec. 29, and traded at $7,530 at 5:30 p.m. Singapore time. September-delivery on the SHFE fell 1.4 percent to 54,530 yuan ($8,562) a ton.

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