Chinese Exchanges Hike Margins On Virtually All Commodities In (Temporary) Attempt To Cool Surging Prices

Just because the CME's hikes in all sorts of commodity margins were perfectly innocent and only had to do with "risk management" functions, we read with little surprise that China's Dalian Commodity and Shanghai Futures Exchanges are now also in the indirect price suppression, pardon, risk management business. Earlier reports confirm that both exchanges will hike margins on virtually every single commodity traded in China. This is likely the last stop gap measure before the central bank is forced to implement a rate hike and cool already near record inflation. As the CME's failed attempts to kill silver and gold price appreciation using margin pressure have so far done very little, we expect that the short-term impact of this move will wear off within a weak, at which point prices will resume their upward climb with a vengeance.

From Dow Jones

BEIJING (Dow Jones)--The Dalian Commodities Exchange will raise the required margins for soybean, soymeal, soyoil, palm oil, corn, linear low-density polyethylene and polyvinyl chloride contracts to 10%, effective Monday, the bourse said in a statement on its website Friday.

The daily limit for price movements will be increased to 6%, it said.

The changes follow government calls to crack down on speculative activity that has been driving price increases, especially in agricultural commodities.

"The move can efficiently curb speculation," said Liu Qing, an analyst at Xinhu Futures Co.

She said the measures were unusually strong, as margin requirements are usually raised only before holidays.

"The exchange will take more risk-control measures to stabilize the market, if risks increase," the DCE said.

On Tuesday, it had raised the required margins for soymeal and soyoil to 7%.

The Zhengzhou Commodities Exchange--on which cotton, sugar, wheat, rice and rapeseed oil are traded--raised required margins and daily trading limits for some of its key agricultural products effective Friday.

Trading limits for cotton, early-season rice and sugar were lifted to 7%, with margins set at 12%, it said. Hard wheat trading limits were raised to 6%, with margins set at 10%.

Normally, minimum trading margins for products on the Dalian and Zhengzhou exchanges are set at 5% and daily trading limits range between 4% and 6%.

The government has become increasingly concerned about inflationary pressures, however, so various ministries and departments have begun to take action.

The Ministry of Agriculture has urged farmers to expand area cultivated with vegetables to ensure supplies, the China Banking Regulatory Commission has ordered banks to extend more loans to agricultural producers and traders, and the People's Bank of China has said it will reduce excess liquidity in the banking system.

The increase in the country's consumer price index hit a 25-month high last month. The index rose 4.4% from a year earlier in October, driven by a 10.1% rise in food prices, which account for one third of the CPI basket.

And just to make sure the message is heard loud and clear, the Shanghai Futures Exchange did an identical move just hours earlier.

From Bloomberg:

The Shanghai Futures Exchange, where the world’s top three metals contracts are traded, will increase margins and daily price limits in the latest move by China to curb speculation and cool inflation.

Margins on copper, aluminum, steel wire, gold and fuel oil will rise to 10 percent, the bourse said in a statement. They gain to 12 percent for steel-reinforcing bars and zinc, and to 13 percent for rubber, after the market closes on Nov. 29, it said. Daily price limits for all products will widen to 6 percent from Nov. 30, it said.

China, the world’s biggest consumer of commodities, has pledged to control prices, and may raise interest rates a second time this year to slow the fastest inflation in two years and curb food costs that jumped 10.1 percent in October. The nation has also made trading commodity futures more expensive.

“This is another move aimed at controlling risk and curbing speculation,” Yu Ye, an analyst at Minmetals Futures Co., said by phone from Shenzhen.

Bottom line: these moves will achieve a price drop in the near term as marginal speculators are kicked out. We anticipate that the effect will last about a week, at which point price increases will resume with an even more pronounced pace and the PBoC will have no choice but to hike rates. For now, however, crisis has been averted, and yet another can kicking stop-gap has been implemented that does nothing to fix the underlying problem and everything to soothe the symptom in hopes that someone somewhere will actually do the right thing.