China's Great Commodity Bubble Loses Air Before It Can Burst

Updated on
Assessing the Health of the Chinese Economy
  • Trading volume, turnover shrink by half from April peak
  • Regulators have ordered exchanges to clamp down on speculation

The fever that’s gripped Chinese commodity markets is easing.

Speculators who traded 1.7 trillion yuan ($261 billion) futures in a single day last month have retreated as fast as they advanced. Trading volumes across the nation’s three biggest exchanges are more than half of what they were at their peak on April 22 and back to levels similar to a year ago, according to data compiled by Bloomberg. The amount of money changing hands on a daily basis has shrunk to $114 billion.

The slowdown marks a return toward normality after a frenzy that drew comparisons with the credit-driven stock market rally last year that preceded a $5 trillion rout. Investor appetite has waned after the exchanges raised transaction fees and margins amid orders from regulators to limit speculation.

“It’s pretty crazy to see such a quick move in trading volumes, compared with historical levels,” Zhang Yu, an analyst with Yongan Futures Co., said by phone from Hangzhou in Zhejiang Province. “Some investors are exiting after the exchanges’ measures.”

About 34 million contracts of everything from eggs to steel changed hands on the Dalian Commodity Exchange, Zhengzhou Commodity Exchange and Shanghai Futures Exchange on Wednesday, down from a peak of 80.6 million contracts seven sessions earlier. About 33 million contracts were traded at the end of April a year before. Chinese exchanges include both sides of a transaction in market data.

Market Cooled

Some commodities have seen reduced turnover and short-term trading, showing that monitoring and regulatory moves to cool the market have worked and prevented risks, an official at the Dalian Commodity Exchange said, asking not to be identified because of internal policy.

China’s investors have honed in on raw materials amid signs of a pickup in demand after policy makers talked up growth, added stimulus and the property market rebounded. Government reforms aimed at shutting industrial overcapacity also bolstered concern that supplies of raw materials such as coking coal were falling short, according to Fu Peng, a portfolio manager at Lianzhan Global Macro Fund Management Co.

“With more speculators being let in on this secret, more money poured in the game,” Fu said. “Prices went higher and higher with explosive growth in trading volumes.”

Price Jump

Prices of some of the commodities soared as investors piled in since the beginning of March. Steel reinforcement bar in Shanghai jumped 38 percent through April 21, when it peaked at the highest level since September 2014 amid the heaviest trading ever, rising 20 percent in four days. Hard coking coal futures rose the most on record on April 25 to the highest in 22 months while cotton had it’s biggest single-day advance in five years.

While prices have come off their peaks amid the slowdown in trading, they haven’t collapsed. Steel futures have slid 15 percent since April 21 but are are still almost 20 percent higher compared with the beginning of March at 2,331 yuan a metric ton on Thursday. Coking coal is up 18 percent.

“Commodity prices may fall if the anticipation for demand recovery and supply reform is not met,” Xu Liping, chief analyst from HNA Topwin Futures, said by phone from Shanghai. “The anticipation is the main driver for this round of surge in ferrous metal prices.”

Open interest, or the amount of outstanding contracts at the end of the day, has remained relatively unchanged throughout, indicating that the trading was short-term speculation, with traders holding positions for a few hours and cashing out before the end of the day. At the peak of the trading boom, daily aggregate volume across the contracts was more than three times open interest. It was 1.4 times by May 4.

‘Main Force’

Speculative money “has been rising as a main force in the current commodity futures rally,” Morgan Stanley analysts wrote in a report dated May 4. About 30-40 percent of transactions on Chinese exchanges are for hedging purposes, according to the bank, down from 60 percent previously. The share of speculative money has grown to as much as 60 percent over the past couple of weeks from about 30 percent previously, the bank said.

“It is composed of institutional money from financial brokerages who have now been allowed to trade, commodity futures private equity firms, as well as private retail investor money which tends to rotate rapidly between asset classes,” the analysts wrote.

Among the steps taken by the bourses to dampen the frenzy, the Dalian exchange hiked charges for iron ore contracts to 0.03 percent of the transaction value. The Zhengzhou Commodity Exchange boosted fees for cotton contracts to 6 yuan per lot from 4.3 yuan while the Shanghai Futures Exchange increased margin requirements for rebar and hot-roiled coil to 8 percent from 7 percent.

“A review of the recent trading activity has shown that trading in certain commodities has become less active and the risk-control measures have had their initial impact,” the Shanghai Futures Exchange said in an e-mailed statement. “Excessive short-term trading has been suppressed.”

— With assistance by Feiwen Rong, and Winnie Zhu

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