China’s Next Asset Bubble

Widespread speculation in China’s commodity markets could seriously impact the international markets and probably the international economy.

Extreme speculation in the commodity markets within China have caught the dealers and the investors off-guard.

Transaction quantities and unpredictability have been very severe. The speculators based in China have steered the prices of various commodities (iron ore, steel, soybeans, egg) upwards and then downwards.

The prices of several commodities have crashed after a substantial, but comparatively short-term increase in prices. However, significant harm has been done to China’s delicate market structure and the economy.

According to a report by Bloomberg (a firm that provides international business and financial information), one really surprising aspect of this stretch of speculation is that the ordinary holding term of a commodity futures contract was around three hours in the month of April. In comparison, other trading periods appear to be an investment for the long-duration.

It indicates a huge inclination for risk which could be potentially undermining for China internally, as well as externally for the international economy.

The revival in commodity prices recently across global markets, especially in the US could have been partly due to speculative extremes in China.

It also denotes that a recovery in the inflation outlooks could be an incorrect indicator, which at first glance, translates as a signal of a rally in raw materials requirements. It could also be taken as a signal that the international economy could be steadying and re-stimulating.

Such a false alarm could make the Fed increase interest rates. Though it has not happened as of now, it is a risk that needs to be monitored.

The false breakout could have implied that there is an equilibrium between supply and demand for raw materials. Again, that seems to be a deviation.

Chinese speculators have been known to speculate extremely in the property sector a few years back, in shares the previous year. At present, they have expeditiously shifted to commodities.

There is not enough transparency in the equities and the banking sectors in China, leave alone in the undeveloped commodities sector in China.

However, market experts must carefully monitor for discrepancies like these, which may appear to be localized, but could have international repercussions.

Dealers have booked profits in commodity stocks. This could be the opportunity to reduce the holdings and be ready for a withdrawal in commodities.

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