While Western banks are selling their commodities-trading units left and right, Chinese banks are itching to get into the business, says George Chen of the South China Morning Post.
China Merchants Securities (CMS), mainland China’s 6th largest brokerage by assets, just launched a subsidiary in Britain to expand into commodities markets with a focus on derivatives trading.
Last year, Morgan Stanley was in talks to sell its commodities-trading division to China International United Petroleum & Chemicals. In August, Guangzhou-based GF Securities bought French bank Natixis’ commodities trading unit for $US36 million.
There are a number of reasons why Western banking giants like JP Morgan are getting out of the business. For one, it’s risky trading, and since the financial crisis, banks have been under pressure from regulators to mitigate risk from trades on their balance sheets in order to preserve capital.
And proprietary trading, as you know, is a no-no now.
Another reason is that Western banks have started selling these businesses is because they’re simply not as profitable as they used to be. The Goldman Sachs Commodities index has dropped 57 per cent since it hit its peak in 2008.
Lastly, these trading units have been getting in trouble lately. For example, The Federal Energy Regulating Commission recently fined JP Morgan’s energy trading unit $US410 million for manipulating electricity markets. That unit, J.P. Morgan Ventures Energy Corp., trades not only physical commodities but also their derivatives. It is set to be sold, potentially along with the bank’s metals futures brokerage.
For some, the news that China’s banks are picking up these businesses is problematic for three reasons.
Firstly, some observers are sceptical that China’s banks have the infrastructure to set up commodities-trading units so quickly.
Another question observers have raised is whether or not the country that produces a commodity should also be the home of all the banks that trade its derivatives.
China, for example, is the number one producer of steel. If the country controls the commodity and also controls the price mechanism, it could essentially place China in the driver’s seat on a road it controls.
Lastly, observers are worried about the health of China’s banks in general. The country’s Central Bank just injected liquidity into the system, and gave banks more power to write off small loans in case of a potential cash crunch ahead of the Lunar New Year. Not exactly a vote of confidence for the system in general, and risky trading requires a robust system to handle potential losses/shocks.
All this together stresses the need for international banking regulation to ensure that some systems aren’t taking more risk than others.
But we’d all have to sit down and have a nice, long productive chat about interconnectedness for that to happen. Fat chance.
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