The Era of Prosperity: Chinese Commodities

Executive Summary

Chinese commodities are some of the world’s deepest and most liquid commodities futures contracts, yet institutional adoption remains relatively low. In this piece Misha assesses opportunities for both alpha and diversification in Chinese commodities, where the market is going, and which strategies are best positioned to take advantage of market dynamics.

Introduction

What do bitumen, eggs, rebar, and apples have in common? They are all traded actively in deep, liquid Chinese onshore commodities futures markets yet they are not part of the typical institutional investor’s portfolio.

Ok, that is interesting, but why would a pension or endowment CIO worry about, say, polypropylene futures? The answer, of course, is diversification. Markets are becoming increasingly more efficient. It is becoming harder and harder to identify a new marginal alpha in the set of existing products, and even more challenging to do it at scale. It is far easier to access alpha in nascent markets that are not yet institutionalized.

China is one of the last non-institutionalized markets in the world, viewed by many investors as the final frontier for alpha. While Western investors have explored Chinese stocks through H shares, ADRs and thematic ETFs, they have long overlooked Chinese commodities.

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