China’s exchange problem

From yesterday’s FT: China has an exchange problem – specifically, it has too many of them:

The Chinese government has launched a crackdown on hundreds of unregulated electronic equity and futures exchanges that have sprung up in recent years to trade everything from fine art and commodities to insurance products. The country’s State Council, or cabinet, published a notice on Thursday announcing a campaign to “clean up and consolidate” the many exchanges that have been approved by local governments hoping to foster financial markets in their jurisdictions.

[…] Last week, three new exchanges were established in the city of Wuhan alone – the Wuhan Shipping Exchange, Wuhan Agricultural and Livestock Products Exchange and Wuhan Financial Assets Exchange.

Though this might have some unpleasant and unintended blowback, especially on the dodgier and more implausible exchanges:

Beijing-based Hantang Artworks Exchange, where investors could trade shares in precious artworks owned by the exchange, announced on its website this week that it was halting all trading immediately “in the spirit” of the orders from the State Council.

“…and if you’ve got an open position in For The Love Of God or Untitled Jade Bowl #37 or whatever, well, it sucks to be you. See you in the Caymans!”

And here’s proof, if you needed it, that Chinese regulators couldn’t run a bath – this is the second time they’ve had to shut down hundreds of unregulated “exchanges”:

In the early 1990s, Beijing launched a crackdown on hundreds of equity and commodity futures exchanges that mushroomed across the country and eventually consolidated them into the handful of large, regulated exchanges that exist today.

The China Daily newspaper, on the other hand, is charmingly naive about the whole thing:

The [unregulated] trading houses pose risks, with an absence of clearinghouses, ever-changing trading rules and price manipulation. But investors’ collective intelligence is unlikely to have ignored or missed these risks. Thus, some experts said, if regulators really want to establish financial stability, they need to figure out what needs the exchanges fulfill.

Yes, because the idiot retail investors punting on these unregulated exchanges will be completely au fait with the nuances of counterparty and regulatory risk. And this is just daft:

Hu Yuyue, head of Beijing Technology and Business University’s securities and futures research center, said the answer can be summed up in one word: demand. Hu said many trading houses have sprung up because investors need more financial tools than are being provided by the major, approved futures exchanges, such as the Shanghai Futures Exchange, Zhengzhou Commodity Exchange and China Financial Futures Exchange.

I cannot think of a single possible reason why an investor would “need” a financial tool that allows them to trade CFDs on Other People’s Art. (Though if such things do exist, I want to short the hell out of Damien Hirst and Takashi Murakami.)

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