Between September and November 2016 the Chinese commodity market has experienced an abnormal surge that has been fueled by an explosion in commodity appetite across all of the country’s exchanges. Commodities that would normally not attract such high demand like garlic and zinc are now up for grabs and the traders are buying them at exaggerated prices. This has prompted the authorities to intervene in an effort to cool down the control the hyper commodity trading before it gets out of hand and the artificial bubble being created busts.
Initially the hype in the Chinese commodity market was generated by retail traders who poured their yuan in billions in to the market and started pushing the prices up. Later on a few fund managers joined the band wagon and it is expected that the deep-pocketed hedge fund managers will also channel their billions into the commodity exchanges and drive the prices above the roof.
The trend is not expected to cool down any time soon, with commodity trading within the past three months happening until late hours of the night in China; sometimes up to 11pm when the London and New York markets are most active. When asked about who were behind the price commodity rally at the markets, Tiger Shi, managing partner at brokerage BANDS Financial Ltd which has most of the hedge funds as their clients noted that “There is no doubt that the price moves and the bigger volumes worldwide are being driven by the Chinese, and by professional speculators and financial players.”
The reasons behind the sudden high appetite for commodities seem to have stemmed from the systematic economic changes the government of China is implementing. According to Fu at Lianzhan Global Macro Fund Management, “The nation’s supply-side reforms had a big impact on the market balance, and that’s the fundamentals behind the trading. But at the same time, we’ve got too much money there. There have been no returns from investment in industries. The stock market is neither dead nor alive. Investment in real estate also got curbed; so all the money is rushing into commodities.”
In the last two weeks on November alone, the value of daily transactions at the three leading Chinese commodity exchanges more than doubled to a peak of $226 in November 14th. The spike is backed with the belief that the new reforms that the government is implementing will help to reduce the oversupply of raw materials at a time there are signs of the demand growing. This creates a confluence of perceived higher demand and perceived lower supply which from basic economics automatically dictates that the prices must rise.
Due to the extreme nature in which the prices have been surging, some economic analysts believe that the Chinese government is justified to crack on the traders and attempt to regulate the market. The government in the last few weeks has prevailed on the Dalian and Zhengzhou commodity exchanges and the Shanghai Futures Exchange through tougher trading requirements in order to curb the prices. Among the imposed measures include trading limits, hiking transactions fees and raising the trading margins. Not everyone though is happy with the government crack-down on the commodity prices that are rising uncontrollably. Some analysts think that when the government intervenes in the free market, investors will tend to shy away from China and the end result will be capita flight which is detrimental to the economy at large.
As the price control are being put in place, the Chinese government launched yet another commodity trading center in Shanghai on 26th November 2016. This is in a race to keep up with and beat Tokyo and Singapore as the leading gas pricing hub in the Asia region. In a statement during the launch Xu Shaoshi, director of the National Development and Reform Commission said that, “This will help accelerate the market-based reform in the energy markets, further improve pricing mechanism of oil and gas, promote China’s inclusion in international markets and deepen international energy cooperation.”
It is ironical that the state should get into controlling the prices in the commodity exchanges while they are adding more in an effort to boost the same trade within the region. However, even as the Chinese government takes what will appear as two contradicting actions, the world will be watching to see how far the commodity price hikes will go. If not controlled though the hype would trickle down to other markets in London and New York and finally the global financial market would find itself entangled in the whole circus. Having a structured way of ensuring that trading remains within optimum limits is therefore a necessity in order to maintain order within the markets.