More than 5,000 hedge fund in China move from stocks and real estate into commodities, make the market swing.

For the second time this year the Chinese speculators shaking up global commodity markets, flush the market with cash, make the trading to explode on China’s exchange and sending the authorities scrambling to deflate the bubble before it bursts. The prices of every commodity, from zinc to coal, just jump to a multi-year highs.

Over less than 2 weeks this month, the value of daily transactions on China’s 3 commodity exchanges more than doubled to peak at $226 billion on November 14. Sparked by speculation that government reforms are helping reduce oversupply of raw materials amid signs of improving demand, Chinese money is pouring into commodities as investors look for better returns than other assets, including stocks or real estate. The Bloomberg Commodity Index, for example, has returned 7.4% this year, compared with an 8.3% drop in Shanghai Composite Index of equities and China’s governments efforts to cool the country’s real estate market.

“The nation’s supply-side reforms had a big impact on the market balance, and that’s the fundamentals behind the trading” said to Bloomberg Fu Peng, a portfolio manager at Lianzhan Global Macro Fund Management “But, at the same time, we got too much money there. There have been no returns form investments in industries. The stock market is neither dead or alive. Investment in real estate also got curbed. So all the money is rushing into commodities”. Li Yulong, chief investment officer, said to Bloomberg “Commodities market volatility is liquidity driven, as money from commercial bank wealth management products and private banking accounts flow into the market, seeking higher returns”.

The billions of yuan have poured in from herd-like Chinese retail investors, who chasing better returns and show little regard for market fundamentals. More than estimated 5,000 Chinese hedge funds active in commodities, most of them using algorithmic trading, in which computers execute multiple orders in milliseconds, in a turbo-charging and volatility and volume. About a third of activity on Chinese exchange is executed by automated commands, which generates more volume and greater momentum on global markets.

Chinese traders are often most active during the night session, when trading also typically peaks on the LME and on CONEX in New York. On almost ¾ of the past 30 trading days, copper trading was haviest between 9pm and 11pm in Shanghai, bourse data show. A recent example for the commodity trading habits of the Chinese was on Nov 11, when copper in Shanghai jumped by the most since trading began in 2004 amid a surge in volume. On the London Metal Exchange it gained as much as 7.4%, before sinking 1.7% in the Asian evening. The gap between the day’s high and low was more than $500, the widest in 5 years.

Matthew France, an Asian’s commodities trading expert, said to Bloomberg “I can recall only 2 other occasions in my career where there was such panic and devastating price in copper, but this market today is far less transparent. The machine component is the onshore retail and fund involvement on the Shanghai Futures Exchange and OTC options”.

Volume and turnover have since come off their highs but prices are still swinging. Copper is poised for its biggest monthly advance since 2006 in London and has briefly jumped above $6000 a metric ton. Metals swung between losses and gains on Wednesday after a broad rout on Tuesday that saw zinc tumble the most in 6 years. The government owned exchanges have stepped in to cool trading by raising fess and margins, or cutting the number of new positions allowed daily.  

But after all, in the bottom line, as Tai Wang, a commodity experts form New York said, the price moved caused by Chinese traders “make a strong argument that the Middle Kingdom is once again the center of the world, at least for metals” 

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