We’ve just wrapped up an incredible couple of days filled with events to mark the very first LME Week Asia in Hong Kong. Producers, consumers, metals traders, Mainland exchanges, and LME members from around the world converged in Hong Kong, with more than 900 tickets selling out for the LME Week Asia gala dinner on Tuesday night. It was a big moment for Hong Kong, especially considering our city hasn’t traditionally been a major player in the commodities sector.
We had a marvelous time this week, but we also know that much work lies ahead. When we acquired the LME, it was because we had a broad vision. Our vision, which I outlined at the LME Week Asia seminar on Tuesday morning, involves a three-pronged strategy that focuses on London, Hong Kong, and Mainland China. It boils down to what I like to call the three Ps: Products, Platform, and Participants.
First of all, the LME is equipped with the expertise, intellectual property, brand, and membership necessary to help us develop into a true global leader in commodities. It provides us with the key foundation for developing commodities products. Today, the LME is already a global leader in metals trading and the pricing centre for the global commodities market. In fact, it’s extremely rare to find a business in a free market with a market share of over 80 per cent, which the LME has achieved. This success proves the LME already has an incredible business model. As the new owners of the LME, we want to further build on this leadership. We will do this by building LME Clear, insourcing LME’s IT and building a trade repository. We want to make access to LME’s electronic trading platform as easy as possible for global investors, traders, producers and consumers. All these together will create greater flexibility to develop a broader range of products.
Secondly, we have Hong Kong. We aim to position ourselves as a trading and clearing platform for the new commodities products to be launched in Asia. Our goal in the short term is to ensure the market in Hong Kong is ready for commodities. Developing the necessary infrastructure for physical settlement is a long-term and complex task, so we plan to initially focus on cash settled monthly commodities contracts. That way, we can leverage our existing trading and clearing platforms for equity derivatives, and with some upgrades and enhancements, use them for commodities futures. We are looking at new base metals products that may supplement those in other markets, and also seek to launch commodities products other than base metals when appropriate. Over the long term, we aim to offer physical settlement for certain commodities that are appropriate for our market.
Thirdly, mutual access between HKEx and the Mainland market mainly refers to liquidity and participants. We want to develop Hong Kong into a commodities platform where international products can meet Mainland liquidity, and Mainland liquidity can connect with international liquidity. In other words, we want it to be a market where there is mutual access between international and Mainland liquidity.
This is no doubt an ambitious plan and an ideal situation for Hong Kong. As an optimist, I firmly believe we can make it happen. But I also understand not everybody is convinced. Specifically, London, Hong Kong and Mainland China have raised the following concerns:
|
(1) |
LME members in London fear we may fundamentally change the business model of the LME; |
(2) |
Our friends in Hong Kong may lack confidence in our grand vision; and |
(3) |
Mainland exchanges may fear our plan will lead to competition, or wonder if there is room to cooperate. |
Regarding our stakeholders in London, I want to stress that we are not intending to change the LME’s core business model, which has proven to be extremely successful. We are all aware the LME is not an exchange in the traditional sense of the word. Before the acquisition, it was a trading platform mutually owned by market participants in the fields of base metal production, trading, financing and warehousing. The entire LME ecosystem is highly competitive and sustainable. In fact, it is one of the world’s most successful business models. Each of you may hold a different view about the LME’s ecosystem, but it is undeniable that it has been widely accepted by the global base metal industry, and LME prices have become benchmark prices for global base metals.
These strengths are what made the LME so attractive to HKEx, and what compelled us to make an offer for the bourse. However, the price we offered was based on our intention to turn the LME from a mutually-owned non-profit organisation into a fully commercial exchange. We fully recognise the LME works well and is widely accepted, but it’s important that HKEx is also able to benefit from it. We have no intention of fundamentally changing the internal operating structure of the LME ecosystem, but we will seek a reasonable and fair return on our investment. That’s why we will introduce clearing services along commercial lines in September 2014, and review fees after January 2015. While we seek a return on our investment, we also aim to invest in LME services to provide better clearing and IT services. We are not here for value destruction or value redistribution – we are here for value creation. I believe we can create a larger pie that benefits the LME membership community as well as the LME.
Over time, we also plan to use the LME to offer base metals trading in Asia and move into other commodities. The LME model works great in London, and we intend to preserve its DNA, but we may make changes to Asian-based trading to meet local needs. These new opportunities will create new value, and we hope they capture the imagination of the current LME membership and they join us as we grow together in this new frontier.
I also wish to address some of our Hong Kong friends’ common queries here. Why am I confident Hong Kong will be the first market for mutual access between the Mainland and the world? My rationale is simple. To the Mainland, we are one country. To international investors, Hong Kong has a system different from the Mainland. “One country two systems” is what makes us unique from anywhere else in the world.
When the Mainland opens up its markets, it is not without risk. Therefore it needs a relatively controlled and safe environment before it’s ready to proceed. As a part of China, Hong Kong is an ideal venue and trusted partner that can provide assistance. Hong Kong has served Mainland China well, particularly in securities, which has shown that we can be relied upon.
As there are “two systems”, Hong Kong has a fair and transparent regulatory environment, the rule of law, sound economics and all the talents and capabilities required for financial development. It is these factors and the protection and convenience they offer that attract international investors to our city.
“One country, two systems” is our core competitive advantage. Without the “one country”, Hong Kong would not have the opportunity to support the Mainland. Without the “two systems”, Hong Kong would be no different from other Mainland cities. We must be confident in our own unique advantages. We must not waste these opportunities and responsibilities that these times have bestowed on us.
Finally, I know our Mainland exchange peers are concerned about potential competition. I want to be clear here: if we only talk about competition but not collaboration, it demonstrates that we lack vision. But if we talk only about collaboration and not competition, we are not being honest. From HKEx’s perspective, our strategy is clear. We do not intend to take away business from our Mainland peers. Rather, we are interested in cooperation and creating new markets and new opportunities together. This is the only way we can have a win-win situation. We will not interfere in what Mainland exchanges are doing. Our hope is to join hands with them for the benefit of us all.
Here, I would like to touch a little on another issue I get asked about, which is what I see as a price-setting centre. In my view, a genuine price-setting centre must be one in which both the buyers and sellers can take part. Over the years, China has been producing and consuming at high volumes, but has been failing to transform this quantity effectively into influence in pricing. In other words, it has always been a price taker. If we can build an ecosystem here in Hong Kong, on Mainland China’s doorstep, where both the buyers and sellers can participate and exert their influence, it would definitely help the Mainland’s internationalisation and be a step towards achieving mutual access between the Mainland and international markets. Once we have a practicable Hong Kong model, we will be able to replicate it and extend it to other international markets, too. We hope that Hong Kong can become the starting point in China’s internationalisation, not the finish line. China could then head to New York, London and Chicago. As the market develops, the influence on pricing will return to the hands of consumers. In the process, Hong Kong will be able to play its historical role while continuing to have room for further development.
All in all, it is history that is giving Hong Kong its unique opportunity, and I am deeply confident about our future.
Before I finish, I just want to thank all those who attended the first LME Week Asia in Hong Kong. I enjoyed meeting many of you and hope you had a wonderful time and enjoyed Hong Kong hospitality. I’m sure this will be the first of many LME Week Asia events in our city, and I believe they will get bigger and better with each passing year.
|