China's Speculator Army Train Their Sights on Rocketing RebarBloomberg News
Investors who flocked to stocks in 2015 now buy commodities
‘The fundamentals guys are dumbfounded’ by surge: Bocom’s Hong
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China’s cabal of individual investors is notorious for shifting between assets in the hunt for yield and quick returns. Judging by the gains in rebar last week, the army may have found their latest target.
Before pulling back Friday amid a wider metals selloff, futures on the steel bars used to reinforce concrete slabs had surged 12 percent over the previous 10 days to a more than four-year high. The move, already called a bubble by BCS Global Markets, has some pointing the finger at China’s retail traders, which dominate the nation’s relatively underdeveloped financial markets, pushing liquidity around asset classes as regulators try to contain speculation.
“The fundamentals guys are dumbfounded,” said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong, referring to rebar’s 4.2 percent jump last Monday, its best day since May. “It’s all speculation.”
While some have cited supply curbs in China and even the earthquake in Sichuan province for rebar’s run-up, Hong says the individual investors that got burnt in the country’s boom-to-bust stock rout in 2015 have since been shifting over to Chinese commodities futures, with rebar particularly popular given it’s only really traded in China and has an evening session.
Regulation of the equity market over the past two years has also encouraged the pivot to the less controlled commodity futures bourse, according to Hong.
While China’s capacity reduction drive and ongoing infrastructure demand has supported rebar, “the strong uptick in such a short period of time of late suggests speculative elements” are at work, says Aidan Yao, senior emerging Asia economist at AXA Investment Managers in Hong Kong.
China’s individual investors have poured billions of yuan into commodity futures in recent years, luring big brokers to the trade and also hedge funds seeking better returns.
“If money is being squeezed out to flow into commodities, it would be from property in the first-tier cities, which have been targeted by the tightening measures, and small-to-medium size stocks, which have been coming down quite aggressively recently,” Yao said.
The price spike hasn’t been missed by regulators, with the Shanghai Futures Exchange saying Friday that it will boost intraday trading charges for some rebar contracts and cap daily position limits for traders. Rebar futures retreated on Friday, snapping their longest rally since November as risk aversion took hold of global markets.
This wouldn’t be the first time speculative money has geed up China’s commodities market, with futures for everything from nickel to coal surging in late 2016, and cash also flowing in to more obscure commodities, such as glass. In April last year, regulators also stepped in to curb a speculative blowout.
Volumes on the futures exchange have been ticking up in 2017, jumping to the highest level since November in May, the latest data available. Open interest on rebar, meanwhile, has come off, which is often a sign the market’s being driven by short-term speculators.
— With assistance by Emma O'Brien, Narae Kim, Martin Ritchie, and Alexander Kwiatkowski