The electronic system would make it simpler to verify China that led banks to tighten lending to the sector, said LME chief ownership of metal held in warehouses, easing concerns following a financing scandal in executive Garry Jones.

"This system will make the whole process of warehouse storage, the audit and trailing of warehouse receipts much easier to understand and much more useful," Jones told a conference.

A metals financing scandal in the Chinese port of Qingdao last year rocked metals markets and forced banks to reassess their risk procedures, after cumulative losses among local and Western banks and trading houses topped $3 billion (2 billion pounds).

Jones said the new system, a tie-up with software provider Kynetix, should help free up liquidity by increasing confidence in the sector, and could help the LME's push to open mainland warehouses as part of its strategy of expanding into China.

"We think if we can offer more physical services in warehousing, it will certainly help that process," he said in remarks made after the conference.

The LME would use the new physical market service, called Sentinel, to expand its services into non LME stocks of metals and also potentially to other markets, Jones said.

The LME, which is fully owned by Hong Kong Exchange & Clearing Ltd, was also in talks with the bullion market to develop products around trading and clearing, he said, noting that there were no listed precious metals products in London.

The exchange was also awaiting for UK regulatory approval for LMEClear to take renminbi as collateral, he said.

(Reporting by Melanie Burton; Editing by Richard Pullin and Ed Davies)