China's Dalian futures market has become a hotbed of speculation over the past 2 years, since the government doubled bank lending to $1.4trn during 2009, equal to 1/3rd of GDP. Traders have particularly focused on the assumed linkage between LLDPE (linear low density polyethylene) and crude oil, with price movements mirroring each other most months.
But now there are signs the authorities are getting worried. Their concerns are focused on the agricultural sector, as speculative buying has helped cause food prices to rocket, in turn driving inflation to a worrying 4.4% in October. Thus the regulators have been told to "beef up supervision over the futures market to curb excessive speculation".
Hopefully, this will also dampen speculation in polymer markets, which have become a major factor in setting physical prices in China, as well as in Asia and globally. As the chart shows, LLDPE volumes (blue line) reached a record 93 million tonnes in November, nearly 4 times total annual global production.
Interestingly, however, Dalian's record volume did not lead to higher prices (red line), even though crude oil remained above $80/bbl. This may be the first sign that shrewder traders have decided it might be time to take profits and exit the market. Friday's decision to tighten monetary policy also suggests betting against the government is probably not going to be a winning trade.