Chinese Traders Roil Commodity Markets

By WEI GU

Updated Aug. 8, 2016 8:37 p.m. ET

Lin Chengdong has traded hundreds of millions of dollars in China’s commodities markets, using mathematical models rather than detailed knowledge of commodities to identify trading opportunities.

He is one of a number of speculators who have piled into China’s commodities markets recently, propelling previously little-known futures contracts for iron ore and steel to the ranks of the world’s most heavily traded, and influencing global prices in the process.

“It is easy for professional traders like us to make money in this market,” said the 40-year-old Mr. Lin, whose hedge fund, Foresee Investment Co., manages $1.5 billion in assets. It is among the biggest in China that invests in commodities, according to fund-tracking website Howbuy.com. Foresee’s commodities funds posted annual returns of 36% to 40% each year since 2013 and their assets have quadrupled to more than $400 million, Mr. Lin said.

Chinese markets remain largely closed to foreign investors, and data on them are scarce. But traders say that for years, buying and selling was dominated by state-owned conglomerates, and a handful of funds trading commodities.

Until roughly the last year, metal prices were essentially set in London. Now, China, the world’s top consumer and producer of metals, has become a mover of global prices. Chinese exchanges are staying open until late afternoon in London and midday in New York. That means traders around the world monitor moves in places like Shanghai and Dalian for trading cues, and Chinese traders like Mr. Lin exert a greater sway over global prices.

In July, for example, when silver was trading at relatively cheap levels to gold, Chinese investors plowed into the Shanghai exchange, driving up silver futures there by 13%, which in turn pushed up the international spot price by 6.9%, to a two-year high of $21.10 an ounce.

Earlier this year, a similar spike in iron futures traded in China’s northeastern city of Dalian prompted a 60% rally in the price of physical iron ore traded in global markets.

Trading volume on the Shanghai and Dalian exchanges has exploded, more than doubling year over year in the first four months of 2016, according to China’s National Bureau of Statistics. Dalian-traded iron-ore futures have generated as much dollar volume this year as gold futures in New York, according to Citigroup. Shanghai’s steel rebar futures became the third-most-traded contract in the world by dollar volume.

Financial investors like Mr. Lin are becoming more active, often using the kind of computer-driven trading programs that have become popular on Western markets in recent years. The average tenure of contracts on Chinese futures markets is less than four hours, indicating that “most speculative trades have been conducted through high-frequency transactions,” analysts at Citigroup said in an April report. On the London Metal Exchange, the benchmark futures contracts are for three months.

Ge Weidong, whose profile on social-media app Weibo says “my parents gave birth to me so I can invest,” initially worked for a state-owned cereals, oil and foodstuffs import-and-export company before quitting to trade commodities in Shanghai around 2000. Mr. Ge, who couldn’t be reached for comment, founded what’s now China’s biggest commodities hedge fund, Shanghai Chaos Investment, in 2005.

The number of such funds is mushrooming, growing to 750 at the end of June from 183 in mid-2013, according to Howbuy.com.

Mr. Lin earned a doctorate in finance from Shanghai Jiaotong University, where he learned about high-frequency trading, then took a job in the securities industry. In 2007, he co-founded Rosefinch Investment, one of China’s largest investment firms, and left to start Foresee in 2013. Mr. Lin serves as one of the 15 expert committee members of the National Private Fund Committee of the Asset Management Association of China.

Mr. Lin trades in an office atop Shanghai’s China Financial Futures Exchange. He first saw physical palm oil, soybean meal and iron ore in late May, during a visit to the Dalian Commodity Exchange—prompting him to post photos on his WeChat social-media account.

Mr. Lin’s Dalian visit coincided with a period of extraordinary volatility for Chinese commodities markets, with money from speculators pouring in, then out. Chinese hedge funds, including Shanghai Chaos, amassed short positions on copper in January, which quickly helped drive copper prices to a six-year low on the London Metal Exchange. Retail investors jumped in as well, fueling a series of minibubbles in everything from soybeans to iron ore.

In response, Chinese exchanges raised transaction fees to restrain trading, and made it more difficult to bet with borrowed money. Steel-rebar contracts on the Shanghai Futures Exchange, which had surged 58% in the first four months of 2016, tumbled 28% in May.

Mr. Lin says his commodities funds, which use mathematical models to identify trading opportunities, escaped the extreme gains and losses some other speculators suffered. Foresee’s latest move is abroad: In July, the firm established an office in Hong Kong.

“We may not be known abroad yet,” Mr. Lin said. “But to the Chinese investors who want to move their money abroad, we are a well-recognized name.”

—Biman Mukherji contributed to this article.