Chinese firms are set to increase trading of metals futures on overseas exchanges after authorities eased foreign currency restrictions in the past two months, industry sources said.
This would mean a rise in business for global exchanges such as the London Metal Exchange (LME), owned by Hong Kong Exchanges and Clearing, while it would also help top metals consumer China gain more pricing control.
A trading unit of Jiangxi Copper hedged 1,000 tonnes of the metal on the LME last month and is expected to expand the hedging to other base metals as it increases its global trade, said a source at Jiangxi, who declined to be named because of the sensitivity of the issue.
"That unit can trade overseas futures because it is located in the zone. More firms in the zone would trade overseas futures contracts," said the source, referring to Shanghai's recently established free trade zone (FTZ).
China's foreign currency regulator has eased curbs on offshore lending for companies registered in the zone, a move industry sources say should help state-owned firms in the FTZ hedge their commodity needs better.
The firms can now get a bigger credit facility for overseas hedging, backed by their assets in China, than they would if they looked to trade via a unit outside the country, industry sources said. This would also drive down costs as the firms would not need to set up an overseas unit to do the hedging.
Overseas metals hedging is done through LME brokers.
Some firms in the FTZ are not keen to start overseas hedging yet as a cash crunch in China has made it difficult for them to pay overseas hedging fees, said Liu Jiang, vice president of overseas business centre at China International Futures, the country's biggest brokerage.
ANNUAL FOREX PLANS
China is one of the world's main consumers of metals and agricultural products, as well as a major producer.
While China's demand for hedging has soared in the past decade, forex curbs have capped the ability to fully hedge imports that are priced on overseas futures contracts.
China has been looking to allow more firms and individuals to trade commodities futures contracts on overseas exchanges in a bid to open up its capital markets.
Currently only 31 state-owned firms, including Jiangxi Copper - China's top producer the metal, are authorised to trade overseas futures, although some have been trading on foreign markets for years through their Hong Kong units.
Dealings by these firms on overseas exchanges should also increase as they are no longer required to make yearly forex plan submissions, industry sources said.
The China Securities Regulatory Commission cancelled in January a rule that makes it mandatory for these firms to get an approval for their annual forex use, a report on the regulator's website said. (www.csrc.gov.cn)
The approval requirement had for years restricted China's metals producers from hedging on the LME as they were required to submit plans at the start of the year, making it hard to take advantage when prices were volatile but easy to be trapped by margin calls for their LME positions.