Takeover of LME to help promote yuan trading

The acquisition of the London Metal Exchange will be a breakthrough in further promoting yuan internationalization and tapping the business potential of the mainland commodity derivatives' sector, the Hong Kong Exchanges & Clearing Ltd said.

HKEx, the world's second-largest bourse by market value, successfully bid in June for the LME by agreeing to pay HK$16.67 billion ($2.14 billion) to LME shareholders. The acquisition deal is being reviewed by UK financial regulatory bodies and is expected to be completed by the fourth quarter of 2012.

"The LME acquisition is a catalyst" for further expansion of the offshore yuan market, HKEx Chief Executive Charles Li said on Wednesday at a press conference.

"Currently, mainland financial companies and industrial enterprises lack suitable offshore platforms to hedge their commodity position risks and the LME platform will provide the much-needed offshore trading venue," said Li.

"In the due process, the segment of commodity trading by the mainland companies through the LME platform can create some sort of yuan repatriation mechanism whereas the yuan circulation between the onshore and offshore markets can be further enhanced," Li added.

In addition to yuan internationalization, the LME acquisition will also bolster the revenue stream diversification to the local bourse.

"The LME acquisition will turn the HKEx into a global horizontally and vertically integrated exchange group, expanding beyond equities into additional asset classes," HKEx Chairman Chow Chung-kong said on Wednesday.

The company, which lost its place as the world's biggest exchange operator by market value to the CME Group Inc, is seeking to broaden its business as the pipeline of large initial public offerings from the mainland slows and equity volumes fall.

Besides the LME acquisition, the local bourse is also creating alliances with Shenzhen and Shanghai counterparts.

"The HKEx will strive to expand the presence of the LME on the mainland as well as the Asian commodity market. Acquiring the LME will give us an immediate scale presence in the commodity derivatives sector," Li said.

Currently, the LME handles about 80 percent of base metal futures and options contracts trading.

"Over the years they relied almost totally on the cash market turnover," said Daiwa Capital Markets research head Jonas Kan. "Globally there is a lot of money flowing to the bond market and the equity market has been suffering in a way. In some ways, with the LME acquisition, their reliance on the cash market will further decline."

The local bourse's net profit declined 14 percent to HK$2.2 billion in the first half of 2012, which missed analysts' estimates due to the slump in the market turnover and listing fees.

The stock market's daily turnover value tumbled 23 percent to HK$56.7 billion over the same period due to the lingering European sovereign debt crisis which had taken a toll on market sentiment.

The HKEx declared an interim dividend of HK$1.85 a share, also representing a slump of 14 percent from a year ago.

"The profit decline was expected because of the lower turnover," said Daiwa's Kan. "Going forward, it will depend on how it integrates the LME and whether the average turnover will improve."