Commodities become China’s Hottest New Casino

By Patti Waldmeir & Tom Mitchell at Financial Times

China’s market regulator may have succeeded in taking much of the froth off the country’s surging commodities markets last week, but the message is not filtering down to many dedicated retail traders.

As Chinese markets reopened on Tuesday after the May Day holiday, a few dozen young traders in Shanghai crowded into a small room provided by a local brokerage. The mostly 20-something male traders, dressed in jeans and T-shirts, were looking forward to another week of fevered risk-taking in China’s hottest new casino.

“It’s better for futures traders to be young because they can learn faster,” said Zhang Jun, 26, who has been trading commodities on the Shanghai Futures Exchange for three years but has only recently begun to make any money. “This is not relevant to anything you study before you get here. I don’t know anyone who studied a relevant major,” said Mr Zhang, a mechanical engineer by training.

On April 29, the China Securities Regulatory Commission ordered the country’s three commodities futures exchanges to curb speculation. The exchanges had already taken steps in that direction, by increasing margin requirements and transaction fees while reducing trading hours.

The measures appeared to be aimed primarily at large institutional traders who have contributed to price surges for commodities ranging from steel to eggs, which have increased 50 per cent and 10 per cent respectively over recent months. Liu Shiyu, the CSRC’s new boss, wants to avoid the fate of hisrecently sacked predecessor, who last year presided over a boom and bust on the Shanghai and Shenzhen stock exchanges.

Poor economic data helped Mr Liu’s cause on Tuesday, with the price of the Shanghai exchange’s most popular steel rebar contract falling 4.52 per cent to Rmb2,451 a tonne. Futures for iron ore, the key ingredient in steel production, also took a hit. The most actively traded contract on the Dalian Futures Exchange, which largely trades steel industry inputs, dropped 2.96 per cent to Rmb442.5 per tonne.

At the peak of last month’s China commodities fever, the number of steel rebar contracts traded in Shanghai exceeded volumes for the world’s two most important crude oil benchmarks, Brent and West Texas Intermediate.

On Tuesday at the Shanghai brokerage, housed in the same building as the city’s futures exchange, Mr Zhang and his trader friends were back at work before 9am, buying and selling steel rebar, asphalt and copper futures contracts.

They could trade at home but choose not to because of China’s slow internet speeds, preferring the much faster systems available in brokerages’ trading rooms. For many retail investors, however, profits are elusive.

“In the futures market it’s normal to earn nothing in the first year or two,” said Mr Zhang, a migrant from neighbouring Anhui province who said he had made only Rmb100,000 in three years of trading. “I know people who have given up in the first year because they earned nothing and others who are still hanging in there but have made no profit in four years.”

Liu Xin, a 21-year-old apprentice trader, started buying and selling commodities only nine months ago. Clad in flip flops and a black T-shirt emblazoned with a popular Korean cartoon character, he said he was introduced to the trade by an uncle who buys, among other things, egg futures.

“My uncle has four screens on his desk,” Mr Liu said. “I’ve been coming here since August and only last month did I really start to have a feel for the market and start making money.”

None of the traders thought the CSRC’s recent efforts to rein in irrational exuberance on China’s commodities exchanges would affect them. “The exchange is trying to reduce the amount an individual can trade but I can open more accounts to solve the problem,” Mr Zhang said. “I can open accounts using my father or mother’s identity. A crackdown like that has little influence.”

Source: Commodities Become China's Hottest New Casino - Financial Times

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