Hong Kong 14/06/2016 - Warehouse and logistics reforms would be the key factors for a more mature Chinese commodities markets, panel speakers said during LME Week Asia in Hong Kong.
The comments came after Charles Li, chief executive of Hong Kong Exchange and Clearing (HKEX), said the exchange is currently in dialogue with warehouse companies as part of plans to build a spot commodity trading platform in Qianhai in Shenzhen, China.
The structure of the Chinese commodity market is like an inverted pyramid - financiers are at the top with most participants, with those in trading and capital financing in the middle, and producers, consumers and logistics providers are at the bottom with the least members, the panel speakers said. This contrasts with western structures whereby producers, consumers and logistics players are heavily involved while financiers have the least share in participation, they said.
“In the inverted triangle with the financier at the top, it’s not very stable due to a lack of risk control as seen in the default incidents in Shanghai several years ago,” said Zhenggang Peng, the chairman from Hundsun Technologies Inc.
Applying the LME's expertise in the Chinese market would be beneficial, this evident in the successful operations of western warehouse companies under the LME system, the speakers agreed.
Warehouse companies in China would need to establish their credit reputation in the market to attract more participants, said Gang Li, the co-head of market development at the HKEX.
“A combination of trading platform, warehouses and logistics companies with high credit reputation as a whole would be able to solve the current situation in China,” he added.
The status quo of the current Chinese commodities market is either too liberal - which allows too many retail investors - or has too much speculative activities, said Jinbi He, the Chairman of the Board and CEO of Xi’an Maike Metal International Group.
“The majority of participants in the current physical trading platforms in China are individuals and this makes them more vulnerable to problems,” he said.
The recent frenzied speculation in rebar contracts on the Shanghai Futures Exchange rebar were in part blamed on the participation of too many retail investors who did not understand the product or its market.
(Editing by Vivian Teo)