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Will Shanghai become 鈥楲ME of the East鈥?
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Shanghai’s free trade zone, where foreign investors will be allowed to trade commodities futures, is set to increase the influence of Chinese prices on the global stage.
Domestic commodities futures trading is currently largely off-limits to foreign investors. The government, with few specifics, said on Friday that the process of opening up the market will be gradual in the new zone.
Waiting for reform is nothing new at the Shanghai Futures Exchange, which said last year that foreign participation will be allowed when the bourse’s long-awaited crude oil futures start trading.
Still, market watchers see futures trading as an essential part of the drive to position Shanghai as an international financial center.
Foreign participation would boost liquidity in China’s futures markets and help link domestic prices to rates on the international markets, giving China bigger sway in global commodities, Guotai Jun’an Securities senior economist Lin Caiyi wrote in a note.
She pointed to the London Metal Exchange, the world’s largest metals marketplace, where more than 70 percent of members are foreign firms and 95 percent of trading volume comes from overseas.
The Chinese government has said it will allow expanded trials of “bonded delivery” of commodities in the free trade zone. That refers to the system whereby commodities are exempt from value-added tax and import duties.
From the policy perspective, that may mean new opportunities for foreign exchanges like the LME, which has long sought to set up bonded storage sites in China, the world’s largest user of industrial metals. An LME stab at that goal failed in 2008, when China’s securities regulator said rules were insufficiently developed for such a move.
But the scene has changed. The LME was acquired by the Hong Kong Exchanges and Clearing Ltd last year in a move many analysts saw as a sign of improved chances for the LME to gain approval from China authorities for local warehousing.
A spokesperson for the HKEx said it’s inappropriate for the exchange to speculate on what the Shanghai free trade zone might mean for the LME because details of the new rules aren’t available yet.
“However, we believe the planned Shanghai free trade zone will benefit Hong Kong overall because it demonstrates that the mainland is speeding up its liberalization process,” the spokesperson said. “Hong Kong has benefited from China’s opening up in the past, and we believe an even more open China will increase opportunities for everyone, including Hong Kong.”
Liz Milan, then managing director for Asia at the LME, said last year that establishing warehouses in China would help traders and producers access physical arbitrage more efficiently and would pave the way for the creation of an arbitrage mechanism between the LME and the Shanghai Futures Exchange — a development that would increase trade volumes on both bourses.
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