VINACHEM

Chinese speculators have a new obsession: the commodities market.

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. 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 great ball of China money is moving away from bonds and stocks to commodities," said Zhang Guoyu, a Shanghai-based analyst at Tebon Securities Co. “We’ve seen a lot of people opening account for commodities futures recently."

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.

Going Nuts

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.”

The gain in steel prices isn’t just on the futures market, with spot prices for the physical product also rallying amid a sudden shortage as construction activity accelerates. Rebar prices have risen 57 percent this year on average across China, according to Beijing Antaike Information Development Co., a state-owned consultancy. Even after output of steel increased to the highest monthly volume on record in March, rebar inventory is still falling, signaling a supply deficit.

Higher Costs

To cool activity, the Shanghai Futures Exchange increased transaction fees while the Dalian Commodity Exchange raised iron ore margin requirements. The bourse in Dalian also tightened rules on what it called abnormal trading, which now includes frequent submission and withdrawal of orders and self-trading. The Zhengzhou Commodity Exchange urged prudent investment on cotton futures amid "relatively large price fluctuations."

“There’s a lot of liquidity and there are people looking for opportunity," said Ben Kwong, a director at brokerage KGI Asia Ltd. in Hong Kong. “Investors are just boosted by recent rebound in those commodity prices and it’s speculative behavior."

Futures slid Friday after the exchange clampdown, with contracts on rebar closing down 4.8 percent at 2,619 yuan a ton, its biggest daily decline in six weeks. A gauge of materials shares sank 2.7 percent on the mainland as the benchmark Shanghai Composite Index advanced 0.2 percent.

Officials cracked down on speculators using borrowed money to buy equities after a surge in debt exacerbated the boom-to-bust of the world’s second-largest stock market. When China was spurring lenders to pump credit to aid growth in 2008 and 2009, investors speculated on everything from Pu’er tea to garlic. Easy money is again surging, with new credit topping $1 trillion in the first quarter.

“The market is moving so quickly, yesterday felt just like the stock market in June last year before the crash," Tiger Shi, a managing partner at Bands Financial Ltd. said by phone from Hong Kong. “I think how it goes up, that’s how it will come down.”