Bloomberg News

China Commodity Futures Trade Slumps After Speculation Curbed

July 01, 2011

July 1 (Bloomberg) -- Commodity futures trading in China, the largest buyer of copper and soybeans, tumbled 30 percent in the first half as regulators clamped down on speculation and as the central bank mopped up liquidity to ease rising inflation.

The volume traded on the bourses in Shanghai, Dalian and Zhengzhou totaled 470 million lots in the first six months, compared with 672.05 million lots in the same time last year, according to the China Futures Association. The first-half data included lead and coke futures launched in March and April, respectively, and are counted once for each trade.

China commodity futures were the most traded in the world last year, the China Securities Journal reported on Dec. 31, citing China Securities Regulatory Commission Chairman Shang Fulin. The three exchanges raised margins and suspended trading fee discounts in November in an attempt to curb price surges as inflation accelerated.

“Speculators’ intraday trading dropped a lot as a result of these changes,” said Zhu Bin, assistant general manager of Nanhua Futures Co. “We do not expect the regulator to relax the controls.”

The Shanghai Futures Exchange, Dalian Commodity Exchange, and Zhengzhou Commodity Exchange raised the margin requirements across the board in November and cut the discount fees for intraday trading. The bourses also acted to curb “abnormal” trades between related accounts.

“China’s futures market lacks institutional investors, so as these rules squeeze out speculators, there’s no substitution to provide the liquidity,” Zhu said.

Price Pressure

Consumer prices jumped 5.5 percent in May from a year ago, the fastest pace in 33 months. The People’s Bank of China has raised reserve requirement ratio 9 times to a record 21.5 percent, and interest rates four times since October.

“The aggregated impact of the reserve requirement increases on futures market is significant, ” said Shen Zhaoming, an analyst at Changjiang Futures Co. “It affected both liquidity and open interest.”

The total open interest of commodity futures in China climbed to a record of 5.5 million lots in October, and fell to 3.4 million lots in mid-December, after the anti-speculation policies rolled out, according to Changjiang Futures. The open interest was 4.13 million lots as of yesterday’s close.

“The low liquidity poses challenges to producers when they want to hedge,” especially aluminum makers, said Wang Feihong, a senior analyst at China Minmetals Nonferrous Metals Co. Wang has studied the industry for more than 16 years.

Aluminum Plummets

The trading volume of Shanghai aluminum futures in June totaled 491,292 lots, or 2.46 million tons, down 63 percent from a year ago. China is the world’s largest aluminum producer, and makes more than 1 million tons every month of the light metal used in beverage cans and window frames.

Lead futures launched in March were the least traded on the Shanghai bourse, while coke futures in Dalian were the second least traded, according to the data. The lead futures contract size is 25 metric tons, five times the other base metals futures. Coke futures started trading in April.

“We developed some clients along the industry chain before lead futures launched, and they have opened accounts, but the poor liquidity kept most of them away,” Nanhua’s Zhu said.

--Helen Sun. Editors: Richard Dobson, Ovais Subhani

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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