Western Banks Commodity Scared
Western Banks are selling commodity trading units left and right. Chinese banks are buying ASAP of numerous commodities focusing on derivatives trading.
Last year, Morgan Stanley was talking with China International’s United Petroleum & Chemicals in regards to their commodities trading division. Then in August, Guangzhou based GF Securities bought out French Bank Natixis’ commodities trading unit for a mere $36 million.
So everybody is scratching their head on why the sell off. There are a number of reasons why Western Banking kings like JP Morgan are getting out of this business. First, it requires a look at the pressure western banks have been put under from regulators to mitigate risk from trades on their balance sheets to preserve capital has caused serious reasons for scrutiny.
Now, western banks have started selling these businesses because government regulation has limited profitability and greatly increased risk. The Federal Energy Regulating Commission recently fined J.P. Morgan Energy Trading $410M for manipulating electricity markets.
With deeper analysis, there are significant reasons that are problematic for these Chinese banks to be picking up these businesses so quickly.
- Most consultants are skeptical that China’s banks have the infrastructure to set up functional commodity trading units so quickly?
- China is the number 1 producer of steel. How can the country that controls the commodity and price mechanism, put itself in the drivers seat on the road it controls?
- Finally, there are significant concerns about the health of China’s banks in general. For example, the 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?
Unfortunately, all these extenuating circumstances stress the need for international banking regulations to ensure that some systems aren’t taking more risk than others and creating an imbalance in the financial equilibrium between free enterprise and state owned systems.