The mystery deepens: China’s slowing economy and gravity-defying commodities futures rally
Futures contracts of iron ore and coke surged to their daily limits again on Friday, defying the Chinese authorities’ cooling measures in the commodities markets, which have begun to show signs of the uncontrolled frenzy that gripped the stock markets before they went belly up last summer.
The most actively traded iron ore futures contract on the Dalian Commodities Exchange (DCE) finished up 5.96 per cent, hitting the daily ceiling, mirroring a similar movement in coke futures. Rebar futures on the Shanghai Futures Exchange, meanwhile, jumped nearly 3 per cent.
Chinese authorities have been trying in vain to rein in the unbridled speculation on these futures products this week. The DCE raised the transaction fee for iron ore three times in three days while other commodity futures exchanges have also raised transaction fees and minimum margin requirements.
But save a brief correction earlier this week, the rally remains unstoppable, much to the amazement of global investors perplexed by the inexplicable surge. With the economy slowing and no solid stimulus measure from the Chinese government, which is trying to cut overcapacity in industries such as steel and mining, commodities prices should logically head south rather than north.
But at their peak this year, Dalian iron ore had risen 73 per cent and Shanghai rebar, 62 per cent. On some days, the trading volume in iron ore futures on the DCE exceeded China’s total imports for the whole of last year, according to Reuters.
Many institutional and retail investors withdrew from the sluggish Chinese stock market early this year and piled into commodities futures for quick returns, driving up contracts, including those of iron ore, coke and coking coal, rebar, cotton, and even eggs.
Zhang Xiaojun, spokesman for the China Securities Regulatory Commission (CSRC), which oversees China’s futures market, on Friday said the commission would force futures exchanges to strengthen supervision and curb speculation, adding the regulator would continue to guide the exchanges to adopt “stabilising measures”.
Wen Jian, an analyst at First Futures, said new investors were flocking to the futures market as opportunities for making a fast buck have dried up in the stock, bond and property markets. “So far, the authorities have not tightened up account opening for futures trading even though they are obviously taking some measures to pre-empt a rerun of last year’s stock market debacle,” he said.
Some speculators have been betting that the government is planning more infrastructure spending to meet the economic growth target, said Lu Jie, head of China research at asset management firm Robeco, on the possible reasons for the rally.
“But rationally speaking, can growth driven by infrastructure investment be sustained? And moreover, this growth pattern would seem to be in conflict with the supply-side reform the government is pushing,” he said.
Current prices of iron ore, rebar and coke lack fundamental support when China’s economy is yet to show any solid rebound momentum, Lu said. If the commodities market crashes, it would negatively impact investor sentiment, dragging down China’s stock markets, he added.
Andrew Colquhoun, head of Asia-Pacific sovereigns, Fitch Ratings, said growing regulatory concerns
are “another example of how throwing more credit at China’s economy creates more problems than it solves”.
Beijing has been pumping up the interbank market with fresh liquidity this year to boost growth and alleviate financial risks triggered by corporate bankruptcy and default. The first quarter saw new aggregate financing reaching a new historical high of 6.59 trillion yuan (HK$7.88 trillion), 1.93 trillion yuan more than the same period last year.
“Risky and speculative activity intensifies when credit growth is strong, as it currently is. The boom under way in the property market is another example. Fitch expects the authorities will stand on the brakes again later in the year as concerns over financial system risks once again take precedence over concerns about growth,” Colquhoun said.
