Exclusive: China securities regulator confirms order to curb futures speculation

By Xiaowen Bi

HONG KONG (Reuters) - China's securities regulator on Friday urged commodity futures exchanges to curb excessive speculation following a surge in prices that has sparked fears markets were heading for a dangerous boom-and-bust cycle.

The China Securities Regulatory Commission (CSRC) said it would not allow the futures market to become a "hot-bed" for speculators.

The CSRC comments confirmed a Reuters story earlier on Friday that the regulator had asked commodity futures exchanges in Dalian, Shanghai and Zhengzhou to bring speculative trading activity under control.

Investors, including hedge funds and retail investors, have placed big bets on Chinese commodities futures this year, driving up contracts including in iron ore, rebar, cotton and even eggs. The rally has prompted many analysts to warn of similarities with a boom in the country's stock markets, which reversed into a sharp crash last summer.

The futures market should stick to its fundamental purpose of serving the real economy, and regulators will "adamantly prevent the futures market from becoming a hotbed for short-term speculators," the CSRC said in a statement on its official microblog.

"We will continue to guide the exchanges to take appropriate actions against excessive speculation and illegal behaviors," the regulator said.

Three people with direct knowledge of the situation said the CSRC had issued its order to the exchanges to bring speculative trading under control on Monday.

In response, the exchanges ordered major institutional investors that lack a commodities background to rein in their trading, the people said. They didn't define what was meant by a lack of background in commodities.

"Many local media and researchers mentioned the huge volume and volatility," said one of the people. "The regulator felt nervous. They hope to keep stability."

A spokesman at the Dalian Commodity Exchange declined to comment on the CSRC order, but said the exchange would further improve its mechanism for controlling risks.

The Shanghai Futures Exchange did not immediately respond to a request for comment. The Zhengzhou Commodity Exchange could not be reached for comment.

The sources said the latest measures were partly aimed at cracking down on high-frequency trading, although they did not provide further details.

The exchanges have made several public announcements this week of measures that increase the cost of trading, such as a rise in transaction fees and minimum margin requirements, action that has taken some of the heat out of the rally and traded volumes. Market trading limits have also been widened.

At their peak this year, Dalian iron ore had risen 73 percent, and Shanghai rebar 62 percent. On some days, the trading volume in iron ore futures on the Dalian exchange exceeded China's total imports for 2015.

The measures this week appear to have had an impact and broadly futures prices have calmed, although steelmaking raw materials iron ore, coking coal and coke ended April with their biggest monthly gain on record.

Rebar, a construction steel product, posted its biggest monthly rise ever, with volumes in the most-traded contract in Shanghai hitting a record 1.4 billion tonnes - enough to build San Francisco's Golden Gate Bridge more than 15,000 times over.

Analysts said speculators have been betting that government plans for more infrastructure spending and signs of a pick up in the economy would fuel more demand for commodities.

Others suggested commodities futures markets were the only place left for speculators to make quick profits given weakness in stocks, bonds and housing.

The volatility in prices has already deterred some major industry players from using the futures market. It also marks a setback for attempts to give China's domestic markets more influence over global pricing, analysts say.

The run up in steel prices has been blamed for encouraging some idled steel mills to restart production, adding to a production glut in the country and exports of the metal, which is upsetting other countries.

The CSRC came under fire as China's Shanghai and Shenzhen stock markets slumped as much as 40 percent in just a few months last summer.

In a further blow, a stock index "circuit breaker" introduced in January to limit stock market losses was deactivated after four days of use because it was blamed for exacerbating a sharp selloff.

In its attempts to stabilize stock markets last year, the CSRC instituted a flurry of blunt measures including halting short selling, suppressing trading in index futures and banning share sales by major shareholders in companies.

The official state news agency Xinhua reported in February, without giving details, that the head of the regulator had been removed and succeeded by Liu Shiyu.

(Additional reporting by Ruby Lian in SHANGHAI and Watson Zhang and Samuel Shen in BEIJING: Writing by Pete Sweeney; Editing by Jason Subler and Neil Fullick)