A cardinal investment rule of mine is: if you don’t understand it, don’t touch it. However, not knowing about something is quite a different proposition, and something I have had to tackle time and again in my long trading career. A recent learning curve for me has been Chinese financial markets because, as well as writing for this magazine, I write for the South China Morning Post. The biggest English-language daily in Asia, the business editor asked me to focus on all things Chinese: mainland, Hong Kong, Macau and Taiwan – yes, really.
As the biggest trader and consumer of commodities, China has allocated considerable time and money in developing efficient wholesale and derivative markets for these, partly to exert greater control over their availability and prices. China also has several stock exchanges, again to help raise funds for the many private companies that have sprung up since the economy was revamped. The newest one is Shanghai’s Star Market, launched in July with the backing of President Xi, modelled on New York’s Nasdaq index for up-and-coming technology-heavy newcomers; it’s estimated to have raised $8.7bn (£6.8bn) so far.
Its older sibling, Shenzhen’s ChiNext index, came out fighting last week after raising $3.6bn this year, announcing that rules for new IPOs would change so companies would no longer have to prove two consecutive years of profitability; the change was authorised by the China Securities Regulatory Commission. Shenzhen, cheek by jowl on Hong Kong’s northern border, also trades many of the top 300 large companies that make up the CSI300 index (together with others listed in Shanghai).
I find it an interesting challenge to look at a new market with fresh eyes. ChiNext peaked with a spectacular speculative boom at 4,449 in 2015, subsequently drifting gently until this January when volume peaked at 256bn yuan’s worth. Holding remarkably steady despite the Sino-US trade spat, it’s testament to a resilient market with genuine investor interest.
Shanghai’s Futures Exchange trades precious and base metals, plus a handful of industrial materials. Bitumen is one of these, known as asphalt in the US, it is the heavy residue of distilled crude oil used to tarmac roads. Listed in 2013, it’s not the exchange’s most successful contract but does regularly hit daily volumes of 150,000 and open interest of between 500,000 and 1m contracts. This because it’s a volatile market, regularly doubling then halving in price.
Dalian, at the point of a peninsula near Beijing, has traded polypropylene futures since 2014. A versatile polymer, both a plastic and a fibre, it’s used in all sorts of domestic and industrial applications. In its short charting history, it kicked off at a peak of 12,035 yuan per metric tonne, hitting a nadir at 5,700 yuan, and is currently roughly midway between the two. Open interest is not far off its 1.165m peak, again due to underlying industry hedging demand.
My last chart is that of a fruit future traded on Zhengzhou’s Commodity Exchange. Launched this April, just in time for the boom in retail food prices in China, the jujube red date joins apples on this innovative exchange roughly halfway between Shanghai and Beijing. When fresh, I’m told it tastes like an apple, when dried more like a date.
