* China may allow foreign exchanges to open warehouses in free trade zones
* LME likely to be first to open warehouse in Shanghai's newly approved zone
* Jiangxi Copper, Jinchuan and Maike building warehouses in Shanghai
* More cities want to set up free-trade zones
By Polly Yam
HONG KONG, July 10 (Reuters) - China's top planning body is preparing to let foreign exchanges open commodities warehouses in free-trade zones, sources with government links said, which would grant the London Metal Exchange coveted access to the industrial giant.
The LME, the world's biggest marketplace for industrial metals such as copper and aluminium, is likely to be the first to win permission and get round the current ban on foreign bourses setting up depots in mainland China.
It would be a triumph for the LME's new owner, Hong Kong Exchanges and Clearing (HKEx), whose chief executive Charles Li promised, during the $2.2 billion takeover last December, to shepherd LME-registered warehousing into China.
The LME has sought for many years to set up delivery networks in China to grow its business.
"The National Development and Reform Commission (NDRC) is definitely going to bring the LME into China," one of the two sources, who has knowledge of the government's free-trade zone policy, said on Wednesday.
The sources said the NDRC was working on guidelines for the policy to allow the LME to operate warehouses in the newly-approved free trade zone in Shanghai. An announcement on the first LME warehouse could come before the end of the year.
Asked to comment, an HKEx spokeswoman said its efforts to gain access to mainland warehouses continued and it had no dates for a decision.
"We are still working on the mainland warehouse initiative but we don't have a timeline," the spokeswoman said.
The London-based futures exchange oversees a global warehouse network where its clients can choose to take delivery of consistent quality metals also including lead, zinc, nickel and tin. The LME earns warehouse fees and a percentage of rent.
China is the top consumer of most raw materials and warehouses linked to foreign exchanges there could increase the influence of the world's second-largest economy over commodities trade.
It would also accelerate the opening of China's commodities markets to foreign investors. At present the metals business is dominated by the Shanghai Futures Exchange, which has its own warehouse system.
The move would encourage China's huge industry to use LME metals contracts to manage international price risk and boost LME trading volumes - a boon for Li who has come under pressure to justify the sum his company, which runs Hong Kong's stock exchange, paid for the LME.
The opening of LME sheds in China would help manufacturers there by cutting logistics costs which are a major factor in the premiums or surcharges consumers pay, on top of LME contract prices, to obtain metal.
"We need LME warehousing in China, our clients want it and we've been trying for six years to make this happen," a senior metals industry source said. "This is a big step forward, but it depends on the time frame."
In a related development this month, the official China Daily reported that China had approved the establishment of a free trade zone in Shanghai that would experiment with convertibility of the yuan currency.
Beijing's new leaders, who took over in March, have signalled they want to quicken the process of making the yuan fully convertible over the next few years, as part of efforts to increase its use in trade and support wider financial reforms. The commodity warehouses, being in the free-trade zones, could be pioneers in this process.
Top metals producers in China are already building storage depots in Shanghai's free-trade zone.
One, Jiangxi Copper, China's biggest producer of the metal, was willing to get approval from the LME, a company source said. The firm already runs a logistics company there.
Jinchuan Group, China's third-largest copper producer and top nickel producer, and Maike Metals, China's top private metals trader, are jointly building a warehouse in the zone, trading sources said.
Other free trade zones, once established, could also host warehouses operated by foreign businesses.
The eastern port city of Tianjin and Zhoushan Islands near Ningbo, the third-largest port of China, have also submitted proposals to Beijing to establish free-trade zones, the first source with knowledge of the policy said.
Boosting logistics business in the free-trade zones is expected to bring in more international banks, one of the sources said.
"Trade is always linked to financing, which has to be done by big banks. That also relates to the yuan going into the international market," the source said, declining to be named because he was not authorised to talk about the topic.