The Hague Centre for Strategic Studies

30 October 2012

Recently, I reported on the acquisition of the London Metal Exchange by the Hong Kong Exchange. That move is part of a much broader trend in which China tries to control important, if not all commodity trading platforms. China’s purpose is to have power over resource flows, commodity prices, and thus secure industrial dominance and growth and social stability.

An acquisition that carried many characteristics of politicized economics: involvement of a sovereign wealth fund, the China Development Bank; traded at a price 180 times its annual earnings, leading to a state controlled enterprise overseeing 80% of the metal trading worldwide.

The move is part of a much broader trend in which China tries to control important, if not all commodity trading platforms. China’s purpose is to have power over resource flows, commodity prices, and thus secure industrial dominance and growth and social stability.

In recent months, a series of Chinese initiatives related to trading platforms have taken place. First of all, China launched a trading platform for iron ore in May. In its first three weeks of existence, it had only handled eight transactions for 956,500 tonnes of ore. However, this is likely to change as the major producers of the commodity BHP Billiton, Vale and Rio Tinto – which combined control nearly 70% of the global trade- as well as 26 large steel mills and traders became member of the platform according to mining.com.
 
As another example, China also plans to set up a market for oil futures within this year to rival those that determine benchmark crude prices in New York and London.

In June, the Chinese state-backed Baotou mining company in Inner Mongolia announced to set up a spot market trading platform on rare earth metals in August to strategically control pricing of metals of strategic importance for high tech applications. The exchange represents the most recent of China's efforts to exert control over the pricing of major industrial commodities of which they dominate worldwide production. However, the exchange has yet to work out its operating mechanisms, transaction rules, and product design. Zhang Zhong, general manager of the Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co, China's largest rare earth producer, the initiator of the exchange, said the company has completed all legal procedures and that centrally-administered state-owned enterprises including Aluminum Corporation of China (CHINALCO), China Minmetals Corporation (China Minmetals), and China Nonferrous Metal Industry's Foreign Engineering & Construction Co., Ltd. (NFC) have become shareholders of the exchange, though it will take some time before the exchange is fully functional.‘

During the same period of time, yet another remarkable initiative was published. The PAGE: Pan Asian Gold Exchange (Market) will focus on trading possibilities for ordinary Chinese and Occidentals as well as industries. Given China’s big demand for gold, this exchange could influence global gold markets and the way global gold prices are established. Until now, this capacity is owned by US based COMEX and British LBMA. But change is likely to happen. China sees this exchange as a means to establish a huge trading platform that uses the renminbi, which could facilitate the Chinese currency to become the leading currency for short term gold trading.
 
This will undermine the traditional position of the US dollar in this type of market. At the same time, it will help to create bigger gold reserves to cover the renminbi. These reserves would allow the renminbi to be the internationally accepted trading currency.

Finally, the Chairman of the China Securities Regulatory Commission Guo Shuqing was quoted saying that China plans to launch government bond and silver futures this year, and that the government is looking at the possibility of launching futures trading in agricultural products such as live hogs, late-season rice, eggs and potatoes.

In short, a number of initiatives with potentially structural effects that are not necessarily beneficial to European countries. But they receive little attention and our governments, economic watchdogs or the EU hardly seem to consider the longer term effects. What are the consequences of these Chinese acquisitions and creations of commodity trading platforms? And what actions should we be taking?

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