It appears Russian billionaires and Chinese state companies are merging to finally challenge the highly suspect pricing mechanisms of the West's commodity exchanges.

Sooner the better - VHF

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New Hong Kong Exchange to Debut with Gold Trade

Robert Cookson and Leslie Hook - Financial Times

April 27, 2011

A Hong Kong-based commodities exchange backed by Chinese state companies and Russian billionaire Oleg Deripaska plans to make its trading debut next month with a futures contract linked to gold.

The Hong Kong Mercantile Exchange is betting that the shift in financial gravity from west to east will allow it to challenge the dominance of London, Chicago and New York in global commodities markets.

“Our new platform will offer Asia a bigger say in setting global commodity prices,” said Barry Cheung, chairman of HKMEx.

After gold futures, the exchange plans to introduce other products including precious and base metals, energy, agriculture and commodity indices.

Although Asia has become the world’s engine of commodities demand, largely thanks to the rise of China, the region has so far failed to establish a strong commodities exchange.

The mainland Chinese bourses in Shanghai and Dalian have huge trading volumes but are mostly off-limits to international dealers, while bourses in Singapore and Tokyo have failed to gain global traction.

HKMEx believes that Hong Kong, as an international financial centre on the doorstep of China, stands a better chance of success.

The first product to trade on the exchange will be a 1kg gold futures contract offered in US dollars with physical delivery in Hong Kong.

Gold, which has been hitting record high prices in recent weeks, was chosen as the debut contract because Hong Kong is one of the world’s biggest physical gold markets and an important route for gold to flow in and out of China, the world’s biggest producer of the metal and the second largest consumer.

HKMEx, which originally planned to launch early last year before being dogged by delays, recently won a licence from Hong Kong’s securities regulator and plans to commence trading on May 18.

“It has the potential to be significant,” said a precious metals trader based in Hong Kong. “If the exchange uses the special ability of Hong Kong to trade in renminbi then you could eventually have commodity contracts denominated in renminbi.”

Most attempts at breaking the dominance of London, Chicago and New York, however, have largely failed to gain traction, however, in spite of heavy investment and high-profile backers.

The Dubai Mercantile Exchange, which launched oil contracts in June 2007, has yet to gain wide significance, even though it counts Goldman Sachs, JPMorgan, Morgan Stanley and top oil traders Shell and Vitol as backers.

Singapore offers a gold contract but it is settled in cash, and traders say the Hong Kong Mercantile Exchange’s physical settlement is an advantage. The Shanghai Gold Exchange and Shanghai Futures exchanges also carry gold contracts, and while they have build significant liquidity, they are closed to foreign investors.

“Chinese retail and investor demand is strong, but I’m not sure how easy it will be for Chinese investors to access the Hong Kong Mercantile exchange,” said David Thurtell, commodity strategist at Citi.

The exchange will offer a 15-hour trading window from 8am to 11pm Hong Kong time, overlapping with London and New York trading. It will start trading with 16 members including Morgan Stanley, BOCI Securities, and MF Global.

All transactions on the exchange will be cleared through LCH.Clearnet, the London-based clearing house. Cinnober, a Swedish technology company, provided the trading system.

While HKMEx has not revealed its full ownership structure, major shareholders include Industrial and Commercial Bank of China, Chinese state shipping group Cosco, and En+ Group, Oleg Deripaska’s holding company.

HKMEx’s backers first approached the Hong Kong government in 2006 about establishing a commodities exchange. The bourse’s customers will be able to take delivery at Hong Kong International Airport’s precious metals depository.