LME Head Says China Traders Don't Know What They Buy in Boom

  • `I don't think most people who trade it know,' says Jones
  • Volumes in China's commodity futures `phenomenal,' CEO says

The head of the world’s largest metals exchange said while volumes in China’s commodity futures markets have become phenomenal, it’s possible some traders don’t even know what it is they are buying or selling.

“Why should steel rebar be one of the world’s most actively-traded futures contracts?” Garry Jones, chief executive officer of the London Metal Exchange, said at a conference in Singapore on Wednesday. “I don’t think most people who trade it know what it is.”

Trading of commodity futures in China from steel reinforcement bars -- a benchmark product used in construction -- to iron ore, coking coal and cotton has ballooned this month on an unprecedented surge in retail investor interest. The jump in volumes has stunned global markets, according to Morgan Stanley, while eliciting concern from Goldman Sachs Group Inc. Exchanges in Asia’s top economy including in Shanghai have announced a series of measures this month to cool the frenzy, and said more steps may follow.

‘High Velocity’

“If you look at the client base of most Chinese exchanges, it’s heavily retail-focused,” Jones said on a panel discussion addressing commodities and risk management in China. The exchanges there “have very high retail participation. They have a very high velocity of trading,” he said.

China’s investors have been honing in on raw materials amid signs of a pickup in demand after policy makers added stimulus and the property market rebounded. The speculative activities will be vulnerable to a sharp reversal, once the upward price momentum wanes, according to BMI Research, a unit of Fitch Group, drawing parallels with a rally, followed by a slump, in Chinese equities last year.

China’s latest speculative spike has stunned global markets, Morgan Stanley analysts including Tom Price and Joel Crane said in an e-mailed note this week. Goldman Sachs has said it was concerned about the surge in speculative trading in iron ore, adding daily volumes were so large that they sometimes exceeded annual imports.

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