In China, Nobody Wants To Be A Bagholder

With the frenzied speculation that drove levels and volumes in Chinese commodities off the charts having dawned on everyone from Cramer to Chinese Securities regulators as 'not real', it appears everyone is scrambling to not be the bagholder for this bubble as authorities crackdown on Chinese asset managers pooling retail investor funds, warning of the rise of "ponzi schemes." While nobody knows for sure how much of the trading surge has been driven by individuals, but the evidence suggests retail punters are playing a big role, and as Bloomberg reports, the average holding period for contracts including rebar and iron ore was less than 3 hours in April!

China’s asset managers were warned of “Ponzi scheme” risks from pooling investor funds intended for different products, as an industry association said a joint venture between Citic Trust and Citic-Prudential Fund Management was being punished for violating restrictions on such practices. As Bloomberg details,

Citic-CP Asset Management, known for marketing Uber Technologies Inc. shares in China, has been suspended for six months from issuing new products because of the breaches, according to an Asset Management Association of China statement on its website on Thursday. No one answered at a phone number listed on a website for Citic-CP Asset Management on Friday.

 

The risk from pooling money is that cash from new investors can be used to repay existing investors, as occurs in the scams named after Charles Ponzi. The association reiterated that funds investing in securities are banned from running cash pools and pledged to work with the China Securities Regulatory Commission to cleanse the industry of the practice.

 

In Thursday’s statement, the asset-management association urged its industry to abandon the “grey area,” saying cash pools could hide financial risks for long periods, only to create enormous damage when things went wrong.

Of course, with the now famous Chinese propensity for gmabling on any and everything that is going up, as evidenced by the stunning collapse of average trading periods in commodity futures...

"I’m pretty bored at work, so I trade commodities futures for some excitement,’’ said He, whose account swelled to as much as 700,000 yuan ($107,443) before sliding back to 400,000 yuan at the end of April.

 

“Because I’m making investments with my friend, we can comfort each other when we are making a loss.’’

 

Nobody knows for sure how much of the trading surge has been driven by individuals, but the evidence suggests retail punters are playing a big role. More than 40 percent of the volume in rebar futures last month came during the night session, when it’s more convenient for people with day jobs to trade. The average holding period for contracts including rebar and iron ore was less than 3 hours in April, according to data compiled by Bloomberg.

 

 

Individuals with a bank account and official identity card can open a futures trading account at a brokerage within 40 minutes, with no initial balance required, Morgan Stanley said in a report on May 4.

One would suspect the Chinese do in fact need protecting from themselves as lessons learned from the stock market's bubble burst, the corporate bond bubble's burst, and the real estate bubble's burst still led them to pile into Chinese commodities... and deal with that bursting too...

“The authorities in China are on an ongoing journey of educating investors about risk and reward as well as trying to manage the booming wealth management industry,” Pogson said.