DALIAN, China -- Chinese financial regulators are extending their reach in the markets from stocks to commodities exchanges, which have seen rapid growth in recent years as long-term demand for natural resources grows.
The move comes as investors shift their money to commodities in response to new restrictions on stock trading following the swoon in share prices this summer.
The China Securities Regulatory Commission in September asked the three major commodities exchanges -- the Dalian Commodity Exchange, the Shanghai Futures Exchange and the Zhengzhou Commodity Exchange -- to come up with rules to regulate program trading. Program trading is computer-driven, automated trading that seeks to exploit minute price fluctuations.
Hitting the brakes
The CSRC ordered 164 individual futures investors to stop trading for a month at the end of August, including 152 who had engaged in "abnormal" numbers of trades in excess of 600 times per day. The commission concluded these trades had the potential to cause wild fluctuations in prices.
The securities industry watchdog has widened the scope of its market intervention to include commodities futures, concerned about potential disruptions to supplies of vital economic inputs.
Demand for resources such as iron ore and grain has increased in tandem with China's economic growth. As a result, trading on commodities futures exchanges has been increasing since 2012. The number of trades rose 22% in 2014 from the previous year to 2.5 billion, while the value of transactions climbed 9.2% to 291 trillion yuan ($45.7 trillion).
At present, 52 commodities are listed on China's markets, including agricultural commodities such as corn, soybeans and palm oil; fuels such as coking coal; and basic materials such as cotton and iron ore.
The exchanges want to list more items. The Shanghai exchange plans to create futures for crude oil, while the Dalian exchange will list coal futures. The Dalian exchange, which at present limits trading in iron ore futures to Chinese investors, is considering opening the market to foreign investors.
The Chinese government has tightened controls on stock trading since June in response to the recent plunge in Shanghai stocks, cracking down on "malicious" short selling, for example. Trading in Shanghai stocks has fallen sharply as a result. Investors are now reluctant to short selling. The value of trades on China's stock markets came to $1.69 trillion in August, about half the record high set in June, according the World Federation of Exchanges.
Now the regulators are turning their attention to commodities futures. Data compiled by the China Futures Association shows the number of deals concluded on commodities futures exchanges in China in August jumped 81% from a year earlier; they nearly doubled in value terms. In the first eight months of the year, trading increased 67% on the year.
Walking a tightrope
The CSRC in September cautioned the three exchanges about excessive trading, slowing the expansion. That month, transaction volume grew a more modest 14% from a year earlier, while trading value shrank 42%.
The danger for the regulators is a perception that the moves are arbitrary. This could undermine investor faith in the markets. Foreign investors, in particular, may shy away from commodities exchanges in China in response, even if formal restrictions on their activities are loosened.
Demand for resources, which has fostered the growth of commodities markets in China, is now slackening due to the recent economic slowdown, raising doubts about the markets' future.