As China punishes speculators, billions of dollars exit commodities

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China's commodities futures
Chinese yuan notes are counted inside a bank in Taipei April 23, 2010. REUTERS/Nicky Loh

BEIJING (Reuters) - Billions of dollars in funds exited China's commodities futures in less than a week, the most since February, as regulators curbed speculative trading in a display of Beijing's power to swiftly cool markets.

But the large-scale retreat may prove to be temporary as cash-rich Chinese retail investors could soon return to jolt commodities futures, and given China's size, again cause ripples in global markets. Many of these speculators have little investment experience but have loads of cash to gamble with, a  combination that often leads to wild price swings.

The collapse in prices from multi-year highs came after major commodity exchanges in Shanghai, Dalian and Zhengzhou introduced a series of fee hikes and deposit requirements over the past two weeks to tame a months-long surge in prices.

The market is "in short-term shock", Donghai Xie, chairman and chief investment officer at Entropy Capital, told Reuters on the sidelines of an industry conference in Shanghai on Thursday.

"It may be one or two months before the market becomes calm," he said.

In just four of China's most-active commodities markets - iron ore, rebar, coking coal and glass - a combined 17.5 billion yuan (2.04 billion pounds) in positions were sold between Nov. 11 and Nov. 17, according to a Reuters calculation of exchange data.

The sharp decline in those positions, or open interest, suggested investors took profits as the exchanges slapped on higher transaction fees and margins.

More than 300,000 contracts of rebar, iron ore, coking coal and glass have been shed since Nov. 11, the day many Chinese markets rallied and the exchanges raised transaction fees to tame them, the data showed.

It was the biggest selloff since early February when a combined 19.3 billion yuan exited these markets, based on the data.

The selloff followed weeks of broad-based rallies fueled by retail investors, who were drawn by the upbeat outlook for infrastructure projects that require vast amounts of construction materials such as steel, glass and copper.

The upsurge and the ensuing decline in Chinese futures moved global prices. Iron ore has skidded 8 percent from last week's two-year high near $80 a tonne as Chinese futures slumped. [IRONORE/]

The selldown has spurred speculation among market participants that the major commodity exchanges were preparing to take even more stringent measures to cool prices, possibly limiting the size of positions investors could take.

($1 = 6.8906 Chinese yuan)

By Josephine Mason

(Additional reporting by Gavin Maguire in Singapore; Editing by Manolo Serapio Jr.)