A Hong Kong governmental advisory body has set out a strategy to establish the city as a commodity trading and financial services hub, including by better connecting mainland China and international markets.
Hong Kong’s location, common law system and established financial architecture give it a “natural advantage” in the commodity market, according to a report published this week by the Financial Services Development Council (FSDC).
However, its participation in commodity trading – and in related financial instruments – is currently “relatively limited”, said FSDC, which was established in 2013 to drive progress in the city’s financial sector.
Following studies by an industry working group and consultations with market participants, the FSDC has called for the city to grow its physical commodity trading activity, strengthen the provision of trade finance and offer more efficient hedging capacity.
Strategic commodities Hong Kong should prioritise include iron ore, copper and aluminium, while maintaining its strong position in the gold market, it said. Despite storage constraints, the FSDC said the city could also consider providing futures trading capacity for coal and liquefied natural gas.
Target markets should include mainland China, Asean countries, the Middle East and those where China’s Belt and Road Initiative (BRI) is already active.
The report said this should be underpinned by the development of “a robust multi-currency trade finance ecosystem”, which would support major traders seeking to work with Chinese banks while benefiting from Hong Kong’s financial infrastructure.
Hong Kong could also offer structured credit to BRI exporters and partner with Chinese state-owned enterprises to offer supplier finance facilities.
“By offering competitive credit solutions in various currencies, Hong Kong could position itself as the leading hub for commodity-related financial services in Asia,” it said.
The report is the latest step in attempts by Hong Kong authorities to grow the city’s presence in the commodity trading market.
Hong Kong chief executive John Lee said in an October 2024 policy address that strengthening metals trading in the city would grow the presence of shipping and trading companies, in turn boosting demand for related financial and professional services.
The vision is “conducive to consolidating and enhancing Hong Kong’s status as an international financial, shipping and trade centre”, he said.
Efforts to grow the city’s logistics infrastructure are already progressing.
In January, Hong Kong was approved by the London Metal Exchange (LME) as a warehouse location, which the report described as a “strategic opportunity” to bolster bank confidence and encourage commodity finance lending.
And in April, the Hong Kong Monetary Authority launched Project CargoX, an initiative that aims to use digitalised cargo data to streamline bank processes and help SMEs access trade finance
However, the ability to manage commodity price risk through hedging still “poses significant challenges” to companies based in mainland China but with international operations, the FSDC said.
“For example, foreign firms purchasing metals from the Chinese mainland typically rely on LME for metals market pricing, while suppliers from the Chinese mainland use the SHFE [Shanghai Futures Exchange],” it said.
“The difference in price referencing and the price discrepancies between the two exchanges create complications for companies from the Chinese mainland when hedging.”
The report cited the example of commodity trading giant Glencore using London-based banks for trade finance and the SHFE for hedging.
“Hong Kong could reflect on this model and encourage businesses from the Chinese mainland and others to use our robust financial infrastructure as a central hub for managing the sourcing, transportation, hedging and trading of commodities,” it said.
The FSDC called for support from the government and industry stakeholders to put its recommendations into practice and “lay the groundwork for a dynamic commodity market”.
