China Regulators Complete Final "Drill" In Preparation For Petro-Yuan Futures Trading

Amid all the chatter of Venezuela and Russia potentially creating oil-backed cryptocurrencies, the "huge news" of China"s launch of the Petro-Yuan has fallen off the front page... until now.

This week saw the Shanghai Futures Exchange complete its fifth yuan-back oil futures contract trading drill successfully...

As Bloomberg reports, 149 members of Shanghai International Energy Exchange traded 647,930 lots in the drill with total value of 268.2b yuan, according to a statement from the exchange, which added that the system basically met the listing requirements of crude futures after the drill.

While this was a success, it"s not all plain-saling...

As Bloomberg notes, as the world’s largest energy consumer and an increasing source of investment capital for oil-producing nations, China has an interest in using its own currency rather than that of a geopolitical competitor.

One hurdle for setting up a rival to Brent or West Texas Intermediate: Overseas oil producers and traders would need to swallow China’s capital controls and penchant for occasional market interventions.

Similar hurdles have kept foreign investors as bit players in China’s giant mainland stock and bond markets, and the share of payments in Yuan in the Global SWIFT system has fallen...

"This contract has the potential to greatly help China’s push for yuan internationalization," said Yao Wei, chief China economist at Societe Generale SA in Paris.

 

"But its success will hinge critically on the degree of freedom allowed for the capital flows related to the contract," she said.

 

"It is not unreasonable to envision a world in which the overwhelming share of commodity contracts, especially for oil, are no longer denominated just in dollars," said Eswar Prasad, a former China division chief at the IMF.

 

But "the yuan’s role in global finance will ultimately be determined by the degree of commitment of Xi Jinping’s government to economic and financial market reforms."

But, as we detailed previously, the writing is on the wall for dollar hegemony, and we suspect teh decline in global yuan trade volumes is another reason for China to push ahead sooner.

As Russian President Vladimir Putin said almost two months ago during the BRICs summit in Xiamen,

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

As Pepe Escobar recently noted, "to overcome the excessive domination of the limited number of reserve currencies" is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.

Beijing is ready to step up the game. Soon China will launch a crude oil futures contract priced in yuan. This means that Russia – as well as Iran, the other key node of Eurasia integration – may bypass US sanctions by trading energy in their own currencies, or in yuan. Inbuilt in the move is a true Chinese win-win; the yuan - according to some - will be fully convertible into gold on both the Shanghai and Hong Kong exchanges.

The new triad of oil, yuan and gold is actually a win-win-win. No problem at all if energy providers prefer to be paid in physical gold instead of yuan. The key message is the US dollar being bypassed.

China"s plans for oil futures trading go back more than two decades, with the government introducing a domestic crude contract in 1993 and stopping a year later amid an overhaul of its energy industry. But in 2013, we first hinted at the birth of the petroyuan was looming...

In doing so China is effectively lobbing the first shot across the bow of the Petrodollar system, and more importantly, the key support of the USD in the international arena... setting the scene for the petroyuan.

*  *  *

And now it just became one step closer to reality, as Bloomberg reports, China’s government State Council has officially approved the listing of a crude futures contract in Shanghai, according to people familiar with the matter.

While the date of launch will be determined by China Securities Regulatory Commission and Shanghai Futures Exchange, it would appear we are within weeks of it becoming a reality as China prepares to roll out a yuan-denominated oil contract...

"Approval of the trading rules by the securities regulator marks the clearance of a major hurdle toward launch of the contract," Li Zhoulei, an analyst with Everbright Futures, said by phone.

 

"The latest rules raised entry threshold for investors from the draft rules, which shows the government wants to avoid volatility when it first starts trading."

Which, according to Adam Levinson, of hedge fund manager Graticule Asset Management Asia, will be a “wake up call” for investors who haven’t paid attention to the plans.

Inside The "Wildest Commodity Trade" Ever... Just Don't Blink

Besides the hilariously fabricated economic data and the whole central planning bit - both of which are now everywhere these days - the one most notable feature about China"s economy and capital markets are the constantly rolling, bursting and resurrecting asset bubbles: from housing, to stocks, to bonds, to commodities, to cryptocurrencies, to pretty much anything that isn"t nailed down and can be traded, and back to housing again, the lifecycle of a Chinese assets is best expressed in terms of its "tulipness": how long before the swarming horde of Chinese bubble-chasers, armed with over $35 trillion in closed-capital account credit, latches on, bids it to the stratosphere, then sends it crashing only to repeat the cycle from scratch. And since these bubbles come ever faster and ever more furious, one has to be lightning fast to get in (and out) before it"s all over.

One such place where "if you blink, you missed it" is China’s Zhengzhou Commodity Exchange, the location of what Bloomberg has called China"s "wildest commodity trade" du jour: the buying, and selling, but mostly buying (for now) of ferrosilicon contracts. Trading in futures of the little known commodity - an alloy used to harden steel - exploded this week, as humans became veritable HFT vacuum tubes, with the average contract on Wednesday held for an estimated 39 minutes, according to Bloomberg calculations, as "investors" scrambled to buy just so they could immediately flip it to another greater fool.

And as the chart below shows, a whole lot of greater fools suddenly emerged at the start of the month.

Incidentally, the tenure of oil contracts on the NYMEX is an ancient 47 hours.

As Bloomberg"s Alfred Cang reports, "Ferrosilicon is just the latest commodity contract pounced on by China’s hordes of speculators with an intensity that makes the world’s most liquid markets look leisurely. In repeated bouts of manic trading over the past year, they’ve piled in and out of everything from cotton to zinc, eventually prompting regulators to step in and calm the frenzy."

Of course, the second regulators "step in" to  burst one bubble, the same hordes of speculators immediately shift to another, similar asset, which then becomes the next bubble du jour, and in recent days the choice has been a "hot potato" between the alloy, rebar, iron ore, siliconmanganese, and various other commodities, all of which are traded not with the intention of actually holding on to the asset, but selling it as soon as possible at a higher price, before the whole house of cards comes crashing down.

“There are large volumes of short-term investment in steel and related products such as rebar, iron ore and ferroalloy futures with investors trading momentum and sentiment,” Wei Lai, an analyst at COFCO Futures in Shanghai, said by phone.

For regular followers of China"s "investing" habits, none of the above should come as a surprise. What is surprising, is that this particular bubble hasn"t burst just yet: trading in ferrosilicon peaked on Wednesday with more than 705,000 contracts changing hands. Prices surged to a record $7,726 yuan a metric ton the previous day, up 25% this month (a move which in all honesty is tame when compared what ethereum and bitcoin have done this year).

What is also surprising, is the viciousness with which the bubble hunters swarmed this particular asset: until August, it was one of the quieter contracts on the exchange, with 22,000 contracts trading daily on average in July. Then China"s trading hordes arrived...

A spokeswoman for the exchange declined to comment to Bloomberg on the market movements: after all what can they possible say - "we keep getting overrun by an army of momo housewives"?

Overall, trading in steel and iron ore is the heaviest on China’s three commodity bourses, with volumes that dwarf contracts such as ferrosilicon. An average 7.9 million steel reinforcement bar futures traded on the Shanghai Commodity Exchange in July. Earlier this month, the bourse hiked fees and margins to calm trade in rebar after prices ran up to the highest in four years on speculation that China’s supply-side reforms are creating a shortage, and to cool the latest bubble mania. It failed.

For those curious how to calculate this particular metric, which for lack of a better phrase, we dub "bubble momentum" and bloomberg calls "commodity churnover", here is the answer:

Analysis of aggregate open interest, volumes and trading hours illustrates the extraordinary pace at which Chinese investors are trading commodities futures.

Dividing the average aggregate open interest at the end of each day by the aggregate volume shows the number of futures traded for every outstanding contract. Multiply that ratio by the number of hours in each trading day and you get an estimate for the average tenure of each contract. While Wednesday’s ferrosilicon contracts were held for less than an hour, the average for the month is 3.6 hours. Futures in Siliconmanganese, another alloy used in steel production, change hands at the fastest pace, with an average tenure in August of 2.7 hours. Iron ore is about 3.8 hours on average and rebar is 4.3 hours.

The best thing about China"s bubble factory: once the locals tire of high-frequency trading ferrosilicon, or whatever is the high speed bubble du jour, they can just move on to the next one and do it all over again.

China "National Team" Rescues Stocks As Downgrade Crushes Commodities

Iron ore led a slump in industrial commodities after Moody’s Investor Service downgraded China’s credit rating and warned that the country’s debt position will worsen as its economic expansion slows. However, one glance at the divergence between industrial metals" collapse and the sudden buying panic in Chinese stocks confirms what Asher Edelman noted yesterday about the US markets, China"s so-called "National Team" was clearly intervening...

As Bloomberg reports, Iron ore futures on the Dalian Commodity Exchange fell as much as 5.6 percent to 452 yuan a metric ton, almost by the daily limit, before closing at 455.50 yuan, extending Tuesday’s 3 percent loss. Nickel led a broad slump among base metals, dropping as much as 2.4 percent to $9,125 a ton on the London Metal Exchange. Nickel stockpiles rose the most in more than a year.

In context, the overnight reversal in Chinese stocks is even more obvious...

Moody’s move, downgrading China’s debt to A1 from Aa3, adds to concerns about the effects of a slowdown in the country’s economic growth, following on from downbeat manufacturing readings and weak commodity imports, Simona Gambarini, an analyst at Capital Economics Ltd., said by phone from London. “We’re not particularly concerned about credit growth getting out of hand, but in regards to industrial metals, we have been negative on the outlook for some time on the basis that Chinese growth will slow.”

Will The National Team be back tonight?