Market Manipulation in China: The Wolf of Central District?

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I don’t know if any of you have been following the Sky Atlantic series “Billions” — it may be screened here in the U.K. later than the U.S. and is already history stateside — but after the first two episodes it is following an intriguing if well-worn path of the demon hedge fund manager pitted against the flawed but public-serving attorney general. Echoes of the big short and other films demonizing hedge funds come to mind, but it’s well done all the same.

Two-Month Trial: Metal Buying Outlook

This is not all Hollywood, or wherever Sky films its TV series, though. In the real world, we are seeing the impact of unbridled and largely unregulated hedge funds manipulating the market and our purchase costs, our cash flow, and, ultimately, our profitability every day.

In the US and Europe there are strict regulations, rigorously policed, to control the ability of hedge funds (I use the collective term here to cover all types of private investors) from manipulating the markets but increasingly commodity markets and the shares of companies that are heavily dependent on commodity prices are being driven to unprecedented levels, both up (long) and down (shorted) by Chinese hedge funds.

Metals Hedged Up

Look no further than metals prices since the start of this year.

At the start of the year, at least five commodities in China gained more than 50% from their recent lows in just over two months as daily turnover in the nation’s futures markets jumped by the equivalent of $183 billion, driven initially by coordinated hedge fund action but then supported by retail investors jumping on the bandwagon.

After this burst of speculative trading in the first four months of the year was brought to an end by government restrictions on dealing margins and leverage, the market went into reverse. Seeing the writing on the wall, so did the funds.

China’s steel rebar contract has since fallen 28% this month, its worst performance since it started trading in 2009. Iron ore futures in China are on course for a 24% decline this month, their worst since launching in 2013. While Copper and gold are both facing their biggest monthly drop in six months. Not all this is hedge-fund driven, but much of it is. As copper is shorted so are shares in copper dependent companies like Glencore and Antofagasta.

China Reins in Speculation

China had 3,163 private securities fund management companies with more than $62 bilion under management as of November, according to government figures quoted by the Financial Times. They have the advantage (apart from light oversight) of trading during quiet hours on Comex or London Metal Exchange when liquidity is lower and purchases and sales have a greater impact on the price.

In addition, they have access to information flows because of where they are located, this may take the form of insider trading or it may be simple real-time statistics that they can access domestically but are not widely available globally. Defensible or not, the result is prices have fluctuated wildly with their movements exaggerated by the activities of Chinese hedge funds.

The victims have been consumers forced to pay more for copper, zinc, nickel, iron ore, than they would have done without the shadowy activities of these funds. When regulations were brought in to control the activities of people like the Wolf of Wall Street, we thought we were seeing an end to manipulated markets, only to find they have sprung up on the other side of the world, goodbye Wolfie, hello Zhuang Jia.

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