Singapore 21/10/2015 - Chinese investor interest in base metal futures has declined relative to other futures products while they look to diversify away from commodities, John Browning told FastMarkets.
"Three years ago, the London Metal Exchange was perhaps 40 percent of the off-shore futures contracts traded by Chinese investors," Browning, managing director of newly formed Hong Kong-based futures brokerage BANDS Financial, said.
"The overall volume of off-shore futures trading by Chinese investors has increased but the share for base metal futures has fallen to 10-15 percent," he added.
BANDS Financial - set up by Browning and fellow base metals industry veteran Tiger Shi - is looking to offer clients futures products other than merely commodities futures while Chinese investor interest shifts elsewhere.
"There is no overarching commodity story for Chinese investors, and the volatility in the Shanghai stock market has prompted considerable interest in stock indices and currencies," he said.
"In Hong Kong we were in the right place and the right time for the commodities story. But for now, investors are looking to diversify away from the commodities," he added.
Base metals futures, however, remain attracive for some given the arbitrage opportunities between Chinese and western markets.
"The Chinese and western markets have a different dynamic. What drives the US and European markets do not necessarily drive the Chinese markets and vice versa," Browing said.
BANDS' core clients are interested in the divergent dynamics between Chinese and international markets, he said.
"Despite the lack of the commodity story, there is always interest in similar contracts driven by separate market forces because that creates trading opportunities," he added.
Chinese investors want to trade global markets to manage risk, Browning said.
"Over the last three years more mid-sized companies have emerged from China looking for diversification of their portfolio and products in the global market place; therefore they need to trade non-China futures contracts to invest or manage their risks," he said.
Concurrently, overseas investors are keen to trade in the Chinese markets as well but it is not easy for them to access the Chinese markets.
"Our main focus is still in Chinese businesses who want to tap global markets and [we are] looking to provide the access to China as soon as we can," Browning said, noting the forthcoming launch of oil futures contracts that will be available to foreign investors.
Global investors have largely been kept out of China's futures market due to restrictions on currency flows and foreign participation - foreign companies can trade via brokers but only after setting up a wholly owned subsidiary, which requires a large amount of registered capital.
(Editing by Mark Shaw)