China’s Commodities Futures at Center of Great Ball of Money

The commodities market is the new obsession or Chinese speculators.

Exchanges in Shanghai, Dalian and Zhengzhou have been prompted to boost fees or issue warnings to investors following trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride soared this week.

Contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete. These numbers are eye-popping even though the underlying products may be anything but glamorous.

“The great ball of China money is moving away from bonds and stocks to commodities. We’ve seen a lot of people opening accounts for commodities futures recently,” said Zhang Guoyu, a Shanghai-based analyst at Tebon Securities Co.

Last year China’s stock market saw a similar frenzy before a rout erased $5 trillion from its and resembles earlier bubbles in property to garlic and even certain types of tea. Amid signs of a pickup in demand and as the nation’s equities fall the most among global markets and corporate bond yields head for the steepest monthly rise in more than a year, China’s army of investors is honing in on raw materials.

The improvement in fundamentals and the availability of leverage to bet on commodities is making them irresistible to traders, says Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong.

“These guys are going nuts. Leverage exaggerates the move of the way up, but also on the way down – much like what margin financing did to stocks in 2015,” Hong said.

With spot prices for the physical product also rallying amid a sudden shortage as construction activity accelerates, the gain in steel prices isn’t just on the futures market. According to Beijing Antaike Information Development Co., a state-owned consultancy, rebar prices have risen 57 percent this year on average across China. Signaling a supply deficit, rebar inventory is still falling even after output of steel increased to the highest monthly volume on record in March.

While the Dalian Commodity Exchange raised iron ore margin requirements, the Shanghai Futures Exchange increased transaction fees to cool activity. Rules on what it called abnormal trading were tightened by the bourse in Dalian. The abnormal trading now includes frequent submission and withdrawal of orders and self-trading. Prudent investment on cotton futures amid “relatively large price fluctuations” was urged by the Zhengzhou Commodity Exchange.

“There’s a lot of liquidity and there are people looking for opportunity. Investors are just boosted by recent rebound in those commodity prices and it’s speculative behavior,” said Ben Kwong, a director at brokerage KGI Asia Ltd. in  Hong Kong.

After a surge in debt exacerbated the boom-to-bust of the world’s second-largest stock market, officials cracked down on speculators using borrowed money to buy equities. Investors speculated on everything from Pu’er tea to garlic when China was spurring lenders to pump credit to aid growth in 2008 and 2009. With new credit topping $1 trillion in the first quarter, easy money is again surging.

“The market is moving so quickly, yesterday felt just like the stock market in June last year before the crash. I think how it goes up, that’s how it will come down,” Tiger Shi, a managing partner at Bands Financial Ltd. said by phone from Hong Kong.

(Adapted from Bloomberg)

Categories: Economy & Finance

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