The roulette game all started in the fall of 2014, about 2 years after
Chairman Xi Jinping came to power and became the General Secretary of the
Communist Party of China.
Xi Jinping had campaigned for socialist economic reform, including a
sweeping anti-corruption drive, cutting excess production capacity,
tightening of housing credit, and clamping down on gaming in Macau. Public
feedback was initially positive. However, largely as a result of those
policies, Beijing was facing an increasingly grim economic growth outlook
which was the worst in more than two decades*. Manufacturing activity in
China slowed along with the global economy and the construction sector
stagnated.
In late 2014, the light bulb came on - someone in the higher echelon ranks
thought the stock market could be a penicillin to the economic and social
malaise. The stock market is easily accessible to the public and can serve to
fill/occupy their free time. A rising stock market provides a desirable
savings vehicle (as opposed to low yield bonds), enables listed companies to
raise capital and invest, while local governments and banks can piggy-back on
the taxes and fees generated.
As reported by China Daily Asia on September 5, 2014:
"State-run media in China are trying to do something the securities
industry has failed to accomplish for much of the past three years: get the
world's biggest population to buy more stocks.
The Xinhua News Agency published at least eight articles this week
advocating equity investing after similar stories appeared in the People's
Daily newspaper and on State-run television last month, part of what
Everbright Securities Co said is an increased government push to bolster the
market. Authorities have also cut trading fees, made it cheaper to open new
accounts and organized investor presentations by the biggest listed
banks..."
The banks started margin lending, a practice that's has been prohibited
since 2007.
The results speaks for themselves:
In the aftermath, the government stepped in and since July 2015 purchased
stocks, banned short selling, banned IPOs, and restricted insider selling.
All this did was drive speculators away from the market with volumes
collapsing.
In early 2016, as Chinese economic growth and fundamentals continued to
worsen, the government turned back to what had worked during the 2009 slump:
aggressive lending in the property and infrastructure sectors in Q1 2016
provided relief, and revived the housing market and construction industry. It
also sparked speculation away from the stock market and into the iron
ore/steel commodity sector.
According to an article in the Financial Times:
"The commodities futures market is the most equal in China,"
avows one successful trader, before admitting to one drawback: "It's
difficult to meet women."
Trading commodities in China -- also the world's biggest consumer of raw
materials -- is relatively straightforward.
To set up a commodity futures brokerage account in China, an individual
needs to provide their identity, in some cases with a video verification, and
bank details. A deposit is needed to start trading.
Morgan Stanley estimates 160,000 new accounts were set up online between
July 2015 and February 2016. Individual investors tend to be most active when
markets are rising, and have dominated past rallies in Chinese futures.
The following chart speaks to Chinese investment speculation:
According to an article published by Business Insider Australia on March 9:
"...the equivalent of 977 million tonnes were traded on the Dalian
exchange on Wednesday [March 9, 2016]. Not only was it the highest daily
turnover on record, it exceeded the entire amount of physical iron ore
imported by China over the past year.
In the 12 months to February, China imported a total of 962.6 million
tonnes of an iron ore, the largest year-on-year total on record.
If the level of turnover recorded in Dalian futures on Wednesday was to be
replicated over the course of any one typical trading year, it would equate
to around 240 billion tonnes of ore."
The annual world production of iron ore was 3.22 billion tonnes in 2014,
according to Wikipedia.
The government stepped in, and since May, has raised margin requirements,
increased trading fees, and imposed daily movement limits. Excessive
speculation on property and commodity sectors, and the undesired restarting
of marginal iron ore mines and steel mills have prompted the government to
issue a warning on the state-owned People's Daily which said, on Monday, May
9, that China's economic trend will be "L-shaped", rather than
"U-shaped", and definitely not "V-shaped". Speculators
promptly retreated from the iron ore market resulting in crashing price and
volume.
The following chart shows where speculators turned to:
According to a Bitcoin Magazine article dated May 31, 2016:
"Huobi and OKCoin, the two largest Chinese exchanges that now account
for some 92 percent of Bitcoin global trading by (self-reported) volume, both
reported almost double the usual trading volume over the past weekend. BTCC,
China's third largest exchange, also reported a surge in bitcoin trading
volume, setting a new record on its Pro Exchange."
Huobi's CEO, Leon Li said that: "More and more Chinese investors and
their hot money need a new investment market, and a convenient alternative
investment like Bitcoin is easy to be accepted by the traders."
Given its impossible to curb bitcoin trading, and with limited bitcoin
supply, I would not be surprised at all if Bitcoin approach US$1,000+/BTC in
the near term.
Curiously, if a crypto-currency without intrinsic value can muster such
popularity, why not speculate on gold and silver? Particularly silver, as it
stands out as a "poor man's gold", ideal for action seeking,
trigger-happy Chinese investors.
Indeed, open interest in silver on the Shanghai Futures Exchange has been
steadily increasing this year, with open interest now roughly equal and
equivalent in size to that of COMEX.
Shanghai Futures Exchange Silver contract open interest:
The contract size is 15kg, roughly 500oz, or 1/10 of the COMEX silver
contract size (5,000 oz). The open interest ballooned from less than 200,000
contracts in 2012 to over 600,000 since April 2016.
COMEX silver open interest ('000)
What is the take-away?
- The world is welcoming a new class of investors
numbering in the tens of millions with hundreds of billions in speculative
dollars.
- Those investors may prefer metals over stocks and bonds.
- When those finicky investors arrive, they will create a
torrential wave.
They may not arrive at silver this month or the next, but I soon suspect
they will buy into this compelling, easy-to-understand investment choice. I
own physical silver and manage a company engaged in silver exploration.
Source: Investing.com
Silver traded today at 18 months high.
