Cooling off hot futures market

An engineer inspects operation of the aluminum electrolytic cells at a plant of Linfeng Aluminum Power Co in Linzhou, Henan province. XINHUA

Regulators issue measures to curb speculative trading amid volatile market

With the huge trading volume and surging prices of the financial derivatives market, Chinese regulators have issued a series of measures to curb speculative trading and maintain stability in the whole financial market.

The Shanghai Future Exchanges announced on April 11 the implementation of trading limits for rebar－finished long steel products used mainly in construction－and the increase of transaction fees within the day on April 21.

"The regulation has had an immediate impact on the market, because commodity prices are largely driven by policies," said Zhan Sheng, investment manager from JZ Investment.

The price of rebar was at 3,738 yuan ($557) per metric ton on Thursday, down 8 percent from 4,079 yuan earlier this year, its highest price in 2017.

The rebar position decreased from 9.15 million hands－a Chinese measurement used in the sector－on Aug 11 to 2.12 million hands on Thursday.

One hand is five tons in the rebar futures market and is the minimum amount an investor can buy.

At the same time, the Shanghai Stock Exchange has requested several listed steel companies to issue reports discussing the influence that cutting capacity would have on them, and is requiring their company earnings be more transparent than previously.

On July 28, Chang Depeng, spokesman from China Securities Regulatory Commission, said the commission is carrying out special inspection of futures companies to maintain the stability of the futures market and promote standard operation of the companies.

"These measures are expected to cool the rising investment market, minimize the fluctuation range and make prices more reasonable," said Zhan, emphasizing that the futures market has only been in existence for about 20 years and is thus far less mature than the London Metal Exchange.

The events on the futures market on April 11 is impressive, with daily turnover of about 100 million tons, exceeding the total national output of 99.59 million tons in the first half of the year, the most active day of the futures market historically.

The bulk commodity－including iron, steel and coal－futures' up and down has begun from October last year, because of the supply-side reform and capacity reduction.

Since early June, most commodity prices have been rising further as hot money has flowed out of the property market: The main contract price of rebar at the Shanghai Futures Exchange has surged 40 percent, hitting a four-year high, iron ore soared 30 percent, and zinc increased to a 10-year high.

The previous market has been completely irrational, with speculators ignoring some fundamental elements such as inventory and supply and demand, Zhan said. He added that the irrationality makes for a dangerous financial market.

The hot commodity markets attract not only retail investors in large numbers but also companies from China and even some foreign institutions and hedge funds to join the queue.

"There are some foreign investors but not many, as they, being mature traders, are reluctant to enter a risky market in general," said Zhang Jiawei, director of the introducing broker business at SDIC Essence Futures, a subsidiary of Essence Securities.

Academia Capital, a hedge fund from the United States, has invested in China's futures market, said a report from Hexun.com.

Ivan Szpakowski, its chief investment officer, said that even though speculative trading pushed up the price of raw materials, the commodity prices still have room to rise after a recent correction, but the upside will be reversed in the next six months.

"Once speculative positions have shifted direction, China's commodity markets (can be)... a very attractive profit-making opportunity for short sellers."

With rich trading experience, foreign investors' joining has the function of cooling the market rise, because they will not follow the herd, said Zhan, the non-ferrous expert.

The level of activity on China's metal futures has even passed that of the London Metal Exchange this year, said a report from Hexun.com, a well-known finance platform.

Another reason luring more investors entering the market is that crude oil futures listing may be just around the corner, after several years of preparation, Zhan said.

China is the largest crude oil importer in the world, and the listing of oil futures is the first step for China to influence the commodity's list prices.