SHFE swears by rules, but says futures 'is not a mass market'

The Shanghai Futures Exchange has vowed it won't tolerate any abuse of trading rules after the unprecedented boom-bust episode in Chinese commodities markets earlier this year, adding that its products aren't for mom and pop investors.

"Futures isn't a mass market but a professional one," the nation's biggest raw materials exchange said in comments to Bloomberg News. There'll be "zero tolerance" of any activity that violates regulations, according to the statement, which said more than 900 cases of what it called abnormal activity were settled in the first five months.

Raw-material futures in China in everything from steel to feed surged then swooned in the period from March through to May as retail investors were caught up in a frenzy that drew parallels with the nation's $5 trillion stock-market rout last year. The exchange said that well-functioning markets are a key support for policy makers' drive to achieve supply-side reforms that aid price-discovery and hedging, and that it also plans to press on with opening up to overseas investors.

The exchange will "serve industrial development, especially at a key stage of supply-side reform," it said, referring to the government's drive to rein in excess capacity and shift the economy toward consumption as growth slows. "The Chinese commodity market so far has a low level of foreign participation, so we will continue to push for opening up in an active and steady manner."

Trading in steel reinforcement bar was emblematic of the rise and fall, as retail investors first jumped into commodity markets, lifting prices, then fled as the country's top regulator and exchanges tackled the bubble by raising margins and tightening rules. Turnover in the rebar market on April 21 exceeded the value of all Chinese stocks traded on the Shanghai and Shenzhen equity markets combined. It also topped China's actual rebar production.

Steel and iron in China surged earlier this year as there was a "lot of liquidity looking for a place to speculate" after the central bank pumped in liquidity, independent economist Andy Xie told Bloomberg Television on Tuesday. In the long term, the trend for iron ore is still down, Xie said.

"In the public mind, there's still insufficient understanding of the futures market," the exchange said in the statement, which was received late last month. "The Chinese futures market is still in its infant stage after 20 years of existence. Therefore there are many misunderstandings."

At the height of the craze in April, the London Metal Exchange described volumes in China as phenomenal, and said it's possible some traders didn't know what they were buying or selling. Chief Executive Officer Garry Jones said: "Why should rebar be one of the world's most actively-traded futures?"

"Unlike many competitors overseas, we are a non-profit organization catering to industries," the Shanghai exchange said, without identifying rivals by name. "The SHFE will continue to uphold our rule of serving industrial development, especially at a key stage of the supply-side reform in the country."

The exchange said its unique advantage is its role in developing markets in the world's largest trading nation, citing the "sheer mass" of commodities that change hands. Still, there is a need to raise liquidity in its less-traded contracts, it said, without listing any particular products.