Where All The Commodity Gains Have Come From
Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. Eventually, the excesses will need to be curbed and maybe that starts a new phase of risk-off within China.
As Bloomberg reports, While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete.
The frenzy echoes the activity that fueled China’s stock market last year before a rout erased $5 trillion, and follows earlier bubbles in property to garlic and even certain types of tea. China’s army of investors is honing in on raw materials amid signs of a pickup in demand and as the nation’s equities fall the most among global markets and corporate bond yields head for the steepest monthly rise in more than a year. Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong, says the improvement in fundamentals and the availability of leverage to bet on commodities is making them irresistible to traders. “These guys are going nuts,” Hong said. “Leverage exaggerates the move of the way up, but also on the way down – much like what margin financing did to stocks in 2015.”
China’s fresh boom nears peak just as amateurs pile in
Tyler highlights the “irrational exuberance” in commodities futures markets but Ambrose Evans-Pritchard at The Telegraph nails the cause:
China’s reflation drive has been explosive. New home sales jumped 64pc in March from a year earlier. House prices have risen 28pc in Beijing, 30pc in Shanghai, and 63pc in the commercial hub of Shenzhen. The rush to buy has spread to the Tier 2 cities such as Hefei – up 9pc in a single month.
“The housing market is on fire,” said Wei Yao, from Societe Generale. “In the first quarter, increases in total credit exploded to 7.5 trilion yuan, up 58pc year-on-year. There is no bigger policy lever than this kind of credit injection.”
“This looks like an old-styled credit-backed investment-driven recovery, which bears an uncanny resemblance to the beginning of the “four trillion stimulus” package in 2009. The consequence of that stimulus was inflation, asset bubbles and excess capacity. We still think that this recovery will not last very long,” she said.
Yang Zhao from Nomura …. said the law of diminishing returns is setting in as the economy nears credit exhaustion. The ‘incremental credit-output ratio” has deteriorated to 5.0 from 2.3 in 2008. Loans are losing traction and the quality of investment is falling.
“Be careful. We are nearing the point where things are as good as they get for the first half of 2016. We recommend taking some money off the table,” said Wendy Liu and Vicky Fung, the bank’s equity strategists.
….Michelle Lam from Lombard Street Research said Beijing has retreated from reform and resorted to pump-priming again. “This may last for one or two quarters. But how much longer can Beijing go on creating debt at a breakneck pace?” she said.
Their actions reveal desperation at the PBOC. Faced with the unpalatable choice between running down foreign reserves at the rate of more than $50 billion a month, to support the dollar peg, or devaluing the Yuan which would fuel even greater capital flight, the central bank opted to inject a further round of credit stimulus to ease the immediate pressure. There are no free lunches: further credit expansion pushes China’s economy ever closer to a financial crisis.
We are in for a volatile year. Make that a decade…..