Hong Kong stock exchange proposes 'London connect scheme' for metals

Traders on on the floor of the Hong Kong Stock Exchange on Aug 12, 2015.
Traders on on the floor of the Hong Kong Stock Exchange on Aug 12, 2015. PHOTO: AFP

HONG KONG (REUTERS) - Hong Kong's stock exchange has kicked off a preliminary study to build a "London Hong Kong Connect" scheme to link commodities markets in the two global financial centres.

The scheme, which was first flagged by the exchange's CEO Charles Li last year, was part of a series of cooperation initiatives announced during Chinese President Xi Jinping's visit this week to the UK.

If implemented, it would enable market participants in Hong Kong, which comprise some of the biggest commodities importers in the world, to effectively hedge their trading exposure through the London Metal Exchange (LME), which is the global hub for metals trading.

"Enhanced market access is a key component of our strategy," said Charles Li, chief executive of Hong Kong Exchanges and Clearing Limited, which owns the LME. "This link aims to expand the potential investor base of the LME market, give the LME a new presence in Asia, where it has many opportunities, and support the development of Hong Kong as a commodities trading centre."

The "non-binding memorandum of understanding" for the proposed development of the trading link was signed between Hong Kong Futures Exchange Limited and the London Metals Exchange. Regulatory approvals are still pending and no set date has been announced.

The HKEx and LME hope that such a tie-up would also allow them to offer yuan-denominated futures and other commodities products to European investors, which would further expand the use of the Chinese currency globally. This week, China's central bank sold its first-ever dim sum bond in London.

Still, some market watchers advised caution after recent turmoil in the mainland Chinese stock markets, with some plans such as linking the stock markets of Hong Kong with those in the southern Chinese boomtown of Shenzhen beset by delays.

"We should not be too optimistic for now, because if you look at the Shenzhen-Hong Kong stock connect scheme which has been talked about for a long time but has yet to be launched, you may not expect the Hong Kong-London connect thing to be rolled out immediately as it's cooperation between two countries," said a commodities trader in Hong Kong.