With the collapse of China's smoke-and-mirrors commodity bubble comes the post-mortem as the horde of Chinese gamblers flood from one government-appointed market to another as the American dream of get-rich-quick schemes appears to have been adopted by the burgeoning middle classes now disillusioned with real work. As Bloomberg reports so shockingly, from the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors; but rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016..."you have far too much credit, money sloshing about, money looking for higher returns."
As we detailed previously, the surge in commodity prices was nothing but "churn baby churn" as trading volume exploded but open-interest remained flat.
“With more speculators being let in on this secret, more money poured in the game,” Fu said. “Prices went higher and higher with explosive growth in trading volumes.”
Open interest, or the amount of outstanding contracts at the end of the day, has remained relatively unchanged throughout, indicating that the trading was short-term speculation, with traders holding positions for a few hours and cashing out before the end of the day. At the peak of the trading boom, daily aggregate volume across the contracts was more than four times open interest. It was 1.4 times by May 4.
What started as a logical bet - that China’s economic stimulus and industrial reforms would lead to shortages of construction materials - Bloomberg explains, quickly morphed into a full-blown commodities frenzy with little bearing on reality...
As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu.
Now, as Chinese authorities introduce trading curbs to prevent surging commodities from fueling inflation and undermining plans to shut down inefficient producers, speculators are retreating as fast as they poured in. It’s the latest in a series of boom-bust market cycles that critics say are becoming more extreme as China’s policy makers flood the financial system with cash to stave off an economic hard landing.
“You have far too much credit, money sloshing about, money looking for higher returns,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “Even in commodities where you could have argued there is some reason for prices to rise, that gets quickly swamped by a nascent bull market and becomes an uncontrollable bubble.”
In many ways, China’s financial landscape was ripe for another round of mania.
New credit soared to a record in the first quarter, giving individuals and businesses plenty of cash to invest at a time when several of the country’s traditional sources of return looked unattractive.
Government debt yields were hovering near record lows, while wealth-management products and company bonds had been rattled by a growing number of corporate defaults. Stocks were still too risky for many investors burned by last year’s crash, and moving money offshore had become harder as the government clamped down on capital outflows.
"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 ($107,596) 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, and China’s response to the boom suggest authorities are worried there’s froth in the market.
Officials at the China Securities Regulatory Commission have pledged to prevent excessive speculation, while the Dalian Commodity Exchange said in a statement that “some sectors of the society still have limited understanding of the futures market.’’ Regulators including the CSRC have prepared further measures to limit price fluctuations if abnormal volatility persists, people with knowledge of the matter said last month.
"They don’t want this to turn into a speculative market in commodities," said Tiger Shi, managing partner at Bands Financial Ltd. in Hong Kong, who’s been trading commodities for two decades.
If China’s equity bubble is any guide, regulators may find it difficult to cool excessive speculation without triggering a collapse in prices. Domestic shares lost $5 trillion of value last summer as authorities moved to curb leveraged bets and restrain trading in the stock-index futures market, where volumes tumbled by 99 percent from their peak.
"The worry is that as soon as the bubble bursts, it's everyone out of the door at the same time," said Paul Adkins, managing director of AZ China Ltd., a Beijing-based aluminum consultancy. "It's the last guys out the door that have the most pain."
It's not ending well at all...
China Commodities collapsed....With Iron Ore now down 22% from the meltup highs, entering a bear market...
And Steel Rebar down 25%, extending losses in the US session...