Volume Collapses As China Commodity Exchanges Ordered To "Curb Speculation"

We have been warning about China's speculative commodity trading bubble - spewing false signals around the world about the strength of the real economy - and now, as we suggested previously, Chinese authorities have decided to burst yet another bubble they created.Reuters reports that China's Securities regulator has ordered three major commodity exchanges to "control intraday speculation in commodity markets," ordering them to "curb trading for investors with no commodity industry background." Volume has crashed... and just as it did in the equity markets, price will follow.

As Reuters reports, China's securities regulator ordered the country's major commodity futures exchanges this week to control speculative trading activity, sources told Reuters, after a surge in prices sparked fears of a boom-and-bust cycle.

In response, commodity futures exchanges in Dalian, Shanghai and Zhengzhou ordered major institutional investors that lack a commodities background to rein in their trading, three people with direct knowledge of the situation said. The sources didn't define what was meant by a lack of background in commodities.


Analysts said speculators have been betting that government plans for more infrastructure spending and signs of a pick up in the economy would fuel more demand for commodities.


Others suggested commodities futures markets were the only place left for speculators to make quick profits given weakness in stocks, bonds and housing.

The result...Party's Over!


As Reuters concludes, the measures this week appear to be having an impact. Steel and iron ore futures steadied on Thursday, while other commodities fell further.

"The aim is to restrict the oversized space for profiting from short-term trades, reduce elevated holdings of related products and curb speculation," the Dalian Commodity Exchange said on Wednesday, referring to the moves to increase trading costs.


The volatility in prices has already deterred some major industry players from using the futures market, causing some to take losses and others to reduce their positions. It also marks a setback for attempts to give China's domestic markets more influence over global pricing, analysts say.

And that means prices are set to tumble...


A run up in steel prices has been blamed for encouraging some idled steel mills to restart production, adding to a production glut in the country and exports of the metal, which is upsetting other countries.