China Tries to Gain Better Control Over Increasing Bills for Commodities

The Wall Street Journal reports: “China Targets Commodity Prices by Stepping Into Futures Markets.”

Apparently, China is worried enough about increasing prices in various commodities that it is trying to fight back by creating more of its own futures markets. For example, speculators in commodities may drive up prices in anticipation of Chinese consumption patterns. Chinese officials hope that by having their own futures exchanges, they can generate prices that are more closely tied to Chinese supply and demand dynamics. This is important given China is a significant player in many commodities. The WSJ indicates that “China buys 10% of all crude oil, 30% of copper output and 53% of the world’s soybeans.” Additionally, “the 165 million contracts in white sugar that changed hands on the Zhengzhou Commodity Exchange last year made it the most-active commodity future anywhere.” China’s next target is a an oil futures market given it spent $160B on oil last year.

Given that China remains a communist country “in transition,” I wonder whether China creates these markets as mechanisms for allowing the government more direct controls over pricing. Indeed, the WSJ states: “…the big footprints in China’s futures markets belong to state-owned groups, primarily commodity trader Cofco Corp. and Beijing’s secretive stockpiling agent, the State Bureau of Material Reserve.”

Buyer beware.

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