Beijing is attempting to address hidden dangers in the largest raw material market in the world by proposing stricter than anticipated regulations on commodity trading by its state-owned enterprises.
According to those with knowledge of the situation, the government is seeking input from some of the major state-owned energy, metals, and food businesses.
On draught regulations that are intended to prevent fraud and stop what officials perceive as wasteful financial operations.
It can be tempting to adopt a Western perspective on China and assume that Beijing’s efforts to control commodity futures speculation in order to avert price bubbles are misguided and ultimately doomed to fail.
Market participants accustomed to the Western philosophy of light regulation would probably recoil at China’s.
Most recent attempt to compel the market, in this case for commodities. To act in a way that the government deems proper.
China Mulls Tougher Rules on Commodity
Reuters reported that the exchanges in Dalian, Shanghai, and Zhengzhou had been ask to bring speculative. Trading under control was corroborate by the China Securities Regulatory Commission (CSRC).
Which stated on April 29 that it wouldn’t permit China Mulls Tougher Rules on Commodity domestic commodity futures markets to turn into a “hot-bed” for speculators.
The measures taken by the exchanges include increasing transaction costs and trading margins. With the Dalian Commodities Exchange increasing its iron ore trading margins to 8% from 7%.
Between April 22 and April 28, Dalian increased the transaction fees on contracts for coke and coking coal three times. In addition to raising the minimum margin from 8 percent to 9 percent.
On April 25, the Shanghai Futures Exchange raised the transaction fee for steel rebar from 0.006 percent to 0.01 percent while reducing the length of the night trading session from four hours to two hours.
New regulations also had an impact on other commodities.
But it’s important to note that the steel industry underwent the broadest and most drastic changes. This makes sense considering.
That it seems like quick price increases in steel as well as its basic materials, iron ore and coking coal. Are what are causing the froth in China’s commodity markets.
Since the end of the previous year, Dalian iron ore futures have increased by 65 percent. Reaching a high of 479 yuan ($74) per tonne on April 25, the day the first of the restrictions was announce.
The price has now dropped, closing on April 29 at 456 yuan per tonne.
But more significantly, the number of contracts China Mulls Tougher Rules on Commodity traded has decreased, from a record 10.46 million on March 10 of this year to just 1.911 million on April 29.
Paper iron traded on that day amounted to well over 1 billion tonnes at the record number of over 10 million contracts, surpassing China’s imports for the entire 2015, which came to 952 million tonnes.
Similar trends be seen in the daily volumes of coking coal, which fell from a record 1.536 million contracts on April 26 to barely 530,996 on April 29.
This is close to, but still above, the peak day for 2015, which was 437,638 contracts on Nov. 20.
Rebar volumes in Shanghai decreased from 23.97 million on April 21 to 11.42 million on April 29, a level that is still close to the high end of the 2015 range of between 900,000 and 13 million.
Even though it is still early for the new measures, it seems at first glance that they are functioning just as anticipated.
Prices have declined but have not fallen, and volumes have decreased but not to the point where there are worries about the availability of liquidity for legal users of futures contracts, such as steel mills, miners, and large commodity merchants.
Again, there are still many things that China’s tougher rules on commodities could go wrong. But it appears that this intervention is working better than last year’s efforts. To discourage short-selling that caused havoc on China’s share markets.
Maybe it’s simpler to deflate a speculative bubble than it is to forbid individuals. From selling in a market that is already in decline.