14 November 2018
The prices of iron ore, coal and rebar futures have soared over 20 percent since April. Photo: Reuters
The prices of iron ore, coal and rebar futures have soared over 20 percent since April. Photo: Reuters

China’s commodity market shows excessive speculation

China’s A shares headed south despite improving economic data, in a sign that many are still skeptical about the sustainability of the economic uptick.

Interestingly, Premier Li Keqiang recently visited a highway toll station to ask about cargo throughput.

The premier had shown distrust in official economic data even when he was the Communist Party secretary of Liaoning province in 2007.

He once reportedly told the US ambassador to China that the country’s GDP data was manipulated and could only be used as a reference.

As an alternative, he closely monitors data on electricity consumption, railway cargo volume and bank loans, which came to be known as the Li Keqiang Index.

I noted in this column two weeks ago that China’s economic figures since March have been too good to be true, and the nation has seemingly completed the economic restructuring without any substantial pain.

Premier Li paid a visit to the highway service station in Ya’an, Sichuan province, and randomly asked local workers about cargo volume, according to the official Xinhua News Agency.

He also talked to a cargo driver, and was thrilled to know that the price of sandstone has edged up recently.

There’s speculation that such visits are arranged in advance. It’s been reported, for example, that when local officials learned that former Premier Wen Jiabao was to visit a poor village, they would arrange for several “actors” to make sure everything looked great.

However, Wen would know the real score about the village after visiting the washroom.

In that sense, it’s not easy for the premier to grasp the real picture. And it remains unclear whether the cargo driver is telling the truth or not.

Ya’an city in Sichuan province is a key base for the production of raw materials like iron ore, coal and steel.

Commodity and industrial products have posted sharp price rallies recently, and there should be some real recovery in underlying sectors.

In the meantime, prices of iron ore, coal and rebar futures have soared over 20 percent since April. 

Rebar, in particular, has jumped more than 50 percent since the start of the year.

Industry insiders said the recent price rally was partly driven by improving demand and stock replenishment.

Also, local governments are prohibited from restarting production lines that have already been shut down.

However, massive speculative money has flowed into the futures market, which has driven up the prices of futures within a short period.

Many speculators have found the commodity futures market can create quicker profit than the housing and stock markets.

The futures market has bigger fluctuations and much higher leverage.

Currently, investors only need to pay a 5 percent deposit, which is equivalent to 20 times leverage.

A large number of investors have been lured into the market in light of the easy profit in a couple of days.

For example, the most active rebar contract, RB1610, recorded a turnover of 605.5 billion yuan (US$93.2 billion) on April 21.

By contrast, the combined turnover of the Shanghai and Shenzhen stock markets on that day was only 542.1 billion yuan.

Meanwhile, the record market turnover of rebar contracts on April 21 amounted to 223.6 million metric tons, while China’s rebar output totaled 210 million metric tones. That shows that the market has turned red-hot.

China’s three futures exchanges have unveiled various measures, including raising handling charges and margin requirements, in a bid to suppress excessive market speculation.

Nevertheless, the rebar contract still reported 520 billion yuan of turnover and 198 million metric tons of trading volume on Monday.

It seems that the commodity market has followed the pattern of the once hectic stock market.

The government should immediately launch a crackdown, or the market could threaten the financial stability or even the real economy.

This article appeared in the Hong Kong Economic Journal on April 26.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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