EDITOR NOTE: The retail futures trading market in China is over, at least for now. Chinese banks aren’t allowed to offer these leveraged products, and retail investors are banned from trading them. It’s a sector-wide clean-up. The official reason for this restriction is “risk,” using the crude oil fiasco last year as a catalyst. What China is interested in is controlling the futures linked to the commodities it most values and aims to take a position on--gold, silver, palladium, natural gas, and soybeans. Hence, the draconian action. Governments have ample legal, operational, and military resources to impose harsh limitations and coercive interventions on their people. Any instance of risk to the national economy or national security--real, imagined, or “manufactured”--is always a perfect trigger to tighten control over its citizens. In America, we may see that in the near future with Bitcoin and other cryptocurrencies, should any of them get in the way of the government’s monetary and fiscal operations. We may even see that with gold and silver--whether paper or CUSIP-marked “physical” products--should our economy tailspin, for too many reasons to discuss here, toward its own destruction. This is why we promote non-CUSIP gold and silver products. People buy precious metals to hedge against a weakening or, in extreme cases, a failing economy. But remember that there’s a government and central bank behind that failure. In other words, you can’t hedge against the “effect” while remaining fully exposed to the “cause.”
China's banking regulator has asked lenders to stop selling investment products linked to commodities futures to mom-and-pop buyers, three people with knowledge of the matter told Reuters, to curb investment losses amid volatile commodity prices.
It has also asked lenders to completely unwind their existing books for these products, which they manufacture and sell to individual investors, said the sources, who are involved in and have been briefed on the decision.
The China Banking and Insurance Regulatory Commission's (CBIRC's) order to exit these products has not been reported before. It issued the order this year, two of the sources said.
"The risk contained in banks' commodity-linked investments cannot be easily spotted by ordinary investors, neither can they bear it," one of the sources said. "Banks also don't have enough expertise to run such products properly."
The sources spoke on condition of anonymity as the directive is not yet public. The CBIRC, China's top banking watchdog, did not immediately reply to a Reuters email seeking comments.
The move comes as runaway commodity prices in both onshore and offshore markets have raised regulatory concerns about the risks of speculative bets, prompting China's state planner and exchanges in recent weeks to take price-control measures.
The CBIRC wants to prevent losses like that incurred a year ago by Bank of China (BoC) (601988.SS) on crude-oil linked investment products, the people added.
It has asked lenders, including Industrial and Commercial Bank of China (ICBC) (601398.SS), to report "clean-up progress" on commodities-linked investment products on a monthly basis to regulators, two of the sources said.
The CBIRC has, however, not given a specific deadline to the banks for completely exiting their positions, they added.
The ICBC did not immediately reply to a request for comment.
While the total size of such products in the Chinese banking system is unknown, BoC's $1.8 billion losses tied to just U.S. crude futures highlights the attractiveness of similar products for retail investors looking for higher returns.
FULL SECTOR CLEAN UP
Regulators are worried mom-and-pop investors may get burnt again by the recent big swings in commodity prices, driven by post-pandemic demand recovery, liquidity easing and speculative trading. Government watchdogs have urged Chinese industrial metal firms to maintain market order.
BoC's losses last year had wiped out several thousands of such small accounts held by retail investors, ranging from college students to retired workers, prompting the CBIRC at the time to ask commercial banks to halt new sales of a wide range of investment products linked to commodity futures.
Given the recent price volatility, the ban on new sales has been widened to a full sector clean-up, covering products linked to commodities not specifically targeted before, such as gold, silver, platinum, palladium, natural gas and soy beans, the three sources said.
Prices of most of these commodities have spiked in recent months, while futures prices for iron ore and corn on the Dalian Commodity Exchange as well as steel and copper on the Shanghai Futures Exchange have all hit record highs this year.
Some banks are considering ways to shift part of their existing commodity-linked investments and clients to affiliated brokerages, but that will need a nod from the securities regulator, one of the sources said.
While banks' derivative-like products have flaws in design and risk control, analysts say a harsh sector-wide clean-up means a major setback in China's plans to open up the market.
Despite repeated vows to ramp up financial derivatives, Shanghai Futures Exchange has already halted collaboration with banks on the launch of new derivative products in the wake of BoC's losses, two separate sources told Reuters.
Originally posted on Reuters