Earlier this week the London Metal Exchange announced that its clearinghouse would now accept offshore Chinese renminbi as collateral, effective immediately. MetalMiner Editors and Co-Founders Lisa Reisman and Stuart Burns discuss the significance of this announcement but more important, its potential impact on industrial buying organizations.
Lisa: Do you think this could mean that eventually metals are offered in a currency other than US dollars?
Stuart: I think that is still some way off for the main London market but the HKEx has run RMB-priced Asian mini metals markets for aluminum, zinc and copper since late last year in Hong Kong. This announcement by the LME now is about collateral placed by market participants for open positions. They are not suggesting London contracts will be priced in RMB.
Lisa: Why do you think the LME made this move?
Stuart: On one level there is the recognition of the RMB’s growing importance as an international (although we’d like to point out, not freely traded) currency and of China (and Chinese companies) importance as a major player in the global metals markets. On another level, it could also be seen as a political move. The LME is owned by the Hong Kong Exchanges and Clearing Group (HKEx) and the key to unlocking fair value in their purchase of the LME was always their ability to open up China as a market for the LME’s services. Anything they can do to make the LME more accessible and more acceptable as a trading platform for Chinese companies is a beneficial step in that direction.
Lisa: Does this allow the LME to compete more effectively against the Shanghai Futures Exchange (SHFE)? Is it irrelevant?
Stuart: Yes as to the point above, it makes the LME more accessible for Chinese companies in that they do not have to put up foreign currency as collateral and run a foreign exchange risk on those monies, they can use RMB.
Lisa: Do you think this helps shore up global support behind the renminbi as an alternative global currency?
Stuart: Yes, every development of this sort underlines the RMB’s growing importance as a global currency and is no doubt welcomed by Beijing in spite of them probably viewing the exchange as a competitor of their own SHFE.
Lisa: Do you think there is additional risk to buying organizations if they bought/sold in renminbi?
Stuart: There are always risks in dealing in foreign currencies, many firms are adept at managing their metals price risks but less well acquainted with foreign exchange risks. However, there can also be an opportunity for foreign firms now able to buy and sell in RMB. We have seen situations in which Chinese firms are willing to give more favorable terms if overseas partners are able to pay or receive RMB. Since it is not as fully convertible as the big four currencies (US Dollar/Great Britain Pound/Euro/Yen) there are restrictions on foreign firms accessing RMB. However, more international banks are able to help firms take advantage of RMB transactions by handling simultaneous exchanges to a foreign currency. For the time being, there is no suggestion LME metals will be priced in any currencies other than the US dollar, but it will happen at some point.