Over the past few weeks, the Red Dragon has been breathing fire over its financial markets’ stability again: commodities from aluminium to zinc have been the subject of increasing levels of speculation from Chinese investors.
We know from recent history that China’s desire to embrace capitalism and free trade is resulting in some unintended consequences. There are now more than 100 million registered trading accounts in China – more than there are members of the Communist party in China (88 million).
Last summer, increasing participation from Chinese private investors drove the local stock exchange to bubble-like valuations. The episode ended badly with a crash from its peak in June 2015, that saw almost 50% of the stock market’s value being wiped off.
Although the excitement on China’s stock exchange appears to have cooled significantly recently, it seems that the party may simply have moved elsewhere. We are seeing increasing signs of speculative behaviour from private investors on China’s Dalian Commodities Exchange. Some commentators have gone as far as to blame Chinese ‘cabbies’ for fuelling the price of iron ore.
The chart below provides some context to the extent of China’s recent appetite for trading in commodity futures and the numbers are simply staggering. On some days recently, for instance, futures volumes in iron ore have exceeded the total amount of iron ore that China imported in the whole of 2015 (950 million tons).