Savings have to go somewhere.

And in China, where retail investors have been burnt by several stock market slides over the past year, they’re going straight into the volatile commodity futures market.

Turnover in steel futures reached RMB 606 billion in China last week, according to Bank of America Merrill Lynch.

That’s about RMB 50 billion more than the combined transaction value of the Shanghai and Shenzhen Stock Exchanges.

There are two main reasons for this. Firstly, the outlook for Chinese commodities demand has improved after a round of loose monetary and credit policies, leading people to follow the trend of rising prices.

And secondly, money managers are incentivised to take risks with other people’s money.

Here’s BAML (emphasis ours):

These funds like leverage, which the futures market offers plenty. If they win, the managers win big; if they lose, it’s the investors’ shirt anyway.

Now, as the A-share market in mid-2015 demonstrated, what goes up fast, particularly if driven by leverage, often goes down fast as well.

While the analysts can’t predict exactly when the market will turn down again, the terrifying chart suggests it can’t go on for longer than “a few months at most.”

Here it is:

BAML1

BAML

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Business Insider » Finance

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