China Top Regulator Warns Against Risks in Financial Derivatives

(Bloomberg) -- China’s top banking regulator warned retail investors to avoid financial derivatives, stepping up a bid to curb risks amid rising volatility in global commodities.

Investors that speculate in currency, gold or other commodity futures are set to pay the same heavy price as those betting that property prices will never fall, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission.

Speculation in derivatives by ordinary people “is tantamount to disguised gambling, and their outcome of losses is preordained,” he said at the Lujiazui forum in Shanghai on Thursday.

With global commodities rising to records, Chinese government officials are trying to temper prices and reduce some of the speculative froth. Wary of inflating asset bubbles, the People’s Bank of China has also been restricting the flow of money to the economy since last year, albeit gradually to avoid derailing growth.

China’s largest banks, including the Industrial and Commercial Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co., have suspended the opening of new positions in products linked to commodities such as crude oil, natural gas and soybeans for individuals since April last year in a bid to protect clients against volatile commodities.

The move came after a Bank of China product linked to oil lead to more than $1 billion in losses for clients after falling below zero. Official figures show there are about 1.88 billion yuan ($265 million) in outstanding in commodity-related investment vehicles, making up less than 0.01% of China’s wealth product market.

Guo defended China’s macroeconomic response during the pandemic. Criticism that it amounted to an inadequate contribution to global growth is based on “prejudice or misunderstanding,” Guo said. The policies helped maintain economic growth and avert a deeper global recession and its stable export prices are serving as an “anchor” to global inflation being fueled by money printing in developed nations, he said.

While financial instability has subsided in many areas in China, Guo called for “relentless” efforts to contain risks.

Some bank loans to small businesses are expected to turn sour, shadow-banking activities remain huge and can easily rebound, and different forms of “Ponzi schemes” disguised as financial technology or internet finance keep emerging, he told the forum.

Pan Gongsheng, head of the State Administration of Foreign Exchange, also warned companies of speculating in the Chinese currency, saying at the conference that such bets are doomed to lose.

©2021 Bloomberg L.P.

With assistance from Bloomberg