As AsiaUnhedged said yesterday, the Chinese commodity markets have begun to cool down after regulators put some brakes on speculation in the futures market.
In recent months, the futures market has seen a speculative fervor that sent both the prices and trading volumes for raw materials and agricultural products surging.
According to Chinese media site Caixin, the price of futures contracts for items including coking coal, steel and even eggs surged between January 4 and April 26. The price of coking coal contracts jumped by two-thirds, and the number of contracts traded increased to 2.4 million from 106,000.
After last summer’s rout pulled the rug out from the Chinese stock market’s rally and increasing defaults among bonds, retail investors flocked to commodities in search of short-term gains.
On some days, trading volume of iron ore futures exceeded the total amount of iron ore that China imported in 2015, investment bank Goldman Sachs said in a report.
“The problem in the futures market is that traders looking for quick gains have outnumbered producers or miners who use it to hedge long-term risks caused by price fluctuations,” a source close to the China Securities Regulatory Commission told Caixin. “Too much speculation could turn the market in to a gambling den.”
An investor held onto an iron ore contract or a steel rebar future traded on the Shanghai exchange for just four hours on average, Wu Zhili, an analyst at Shenhua Futures Brokerage told Caixin, while investors in the New York Mercantile Exchange held contracts for 40 to 70 hours on average. These short-term deals accounted for almost 70% of transactions, said Wu.
But it’s not just small investors.
A significant part of the trading comes from futures brokerages that got into the wealth management business. By the end of February, the size of wealth management funds managed by futures companies reached 114 billion yuan, seven times the figure at the beginning of 2015, said Wu Xiaoyong, an official from the securities regulator.
Banks and investment fund managers looking for better yields are pouring money from their wealth management products in to commodities. And now mutual funds want to get into the game.
However, prices began to calm down after the exchanges in Dalian, Shanghai and the central city of Zhengzhou moved quickly to curb excessive speculation.
The Dalian exchange increased transactions fees on coking coal contracts 11 times to 0.072% from April 22 to April 27 “to restrain excessive, short-term speculative transactions … and to maintain market stability,” the exchange said. It also lifted the margin-trading requirement for iron ore contracts to 8% from 7%.
The exchanges also raised the transaction costs for items, such as polyethylene, soybeans and steel rebar.
Several analysts told Caixin that regulators might take tougher steps to prevent a bubble. Others warned exchanges should be prudent when intervening to avoid the kind of turmoil caused when a circuit breaker mechanism was introduced to the stock market in January that would halt trading if the bourse fell by certain levels. It aimed to limit stock market losses, but instead triggered a wave of panic selling.