Veteran investor Jim Rogers says that authorities in China are right to tackle the frenzy of speculative investing that’s broken out in the nation’s commodity futures markets, warning that a failure to act would have stored up problems.
“China is doing their best to cool it off and calm it down,” Rogers, Singapore-based chairman of Rogers Holdings, said in a telephone interview. “That’s good, because over-speculation in anything leads to problems, especially if people don’t know what they’re doing.”
Investors in China have piled into commodity futures this year following signs of a stabilisation in Asia’s top economy, lifting volumes to records and spurring prices.
The upsurge prompted exchanges in Dalian, Shanghai and Zhengzhou to tighten rules, boost fees and in some cases cut trading hours to quell the fervour. Garry Jones, head of the London Metal Exchange, said that it’s possible some people in China didn’t even know what they were buying and selling, a sentiment echoed by Rogers.
“When people start investing in a lot of things and they don’t know what they’re doing, they’re basically going to the racetracks or to the casino,” said Rogers, who’s tracked emerging markets and raw materials for decades, authoring a handful of books including ‘A Bull in China.’ “Whatever the authorities did, they calmed it down. That’s terrific.”
The country’s top financial regulator, the China Securities and Regulatory Commission, pledged last week to prevent the excesses. Bourses must strengthen market oversight and curb speculative trading, Zhang Xiaojun, a spokesman, said at a briefing on April 29.
There are signs the push is working as raw materials decline and volumes tumble. Iron ore prices on the Dalian Commodity Exchange that peaked at 502 yuan ($77) a metric ton on April 25 have declined to 412.5 yuan. Steel reinforcement-bar contracts on the Shanghai Futures Exchange nosedived from a peak of 2,787 yuan a ton on April 21 to 2,309 yuan.
Iron ore giant Fortescue Metals Group on Wednesday praised China’s authorities, saying the moves were putting a brake on speculation that had become unhealthy. Chief Executive Officer Nev Power said that the higher transaction costs would cool the enthusiasm.
Rio Tinto Group Chief Executive Officer Sam Walsh described trade in Dalian as the “wildcard in relation to iron ore at the moment.” The Chinese government is working to put in greater controls because the volumes are excessive, he said in Brisbane on Thursday as the company held an annual meeting.
Chinese commodity futures now dominate the global scene, with 18 of the top 25 contracts on local exchanges, according to Morgan Stanley, which ranked them by average daily value in the last two weeks. The average holding period for rebar and iron ore futures in China is only two and 2.4 hours compared with 25.8 hours for Brent on ICE Futures Europe, it said in a May 4 report.
“It seems the Chinese investors discovered that commodities is a place to invest and started doing so,” said Rogers. “You’ve seen these sort of outbreaks many times from many countries.”