FT Alphaville has talked volumes about China’s cash-for-copper collateral obsession.
Recently, however, speculation has picked up that these trades have started to be unwound — mainly because the Chinese government caught up on the funding loophole, and moved to restrict it.
Indeed, as the Wall Street Journal reported this week:
Now, Beijing has apparently had enough. The People’s Bank of China moved on Friday to require banks to place a part of the original collateral held against letters of credit in low-yielding reserve accounts, instead of allowing them to use it to make more loans. That means it is going to become more expensive to get and give out the letters of credit that fund the whole escapade. The move isn’t likely to crater metal markets, and copper prices were pretty much flat on Monday. That might be because Beijing—mindful of the need for an orderly transition—will implement the new policy in stages through mid-February. It also helps that the move comes just ahead of a traditionally strong season for the construction sector.
While copper prices have hardly restarted their upward trajectory, as the WSJ notes it’s clear the bottom hasn’t fallen out of the market to the degree some might have expected:
Though, could there be other dynamics at work?
According to copper market veteran Simon Hunt of Simon Hunt Strategic Services, the funding trade may have simply shifted offshore. Indeed, as he noted on Wednesday:
Money is tight even more now following the PBOC’s latest measures to mop up surplus liquidity. It is this development which is causing copper demand – not consumption – to be strong in China. Large tonnages of copper and other metals are being used as a means of raising finance for cash strapped companies.
Now most of this business has shifted from Chinese banks to foreign banks in Hong Kong. Given central government’s continued focus on a tight monetary policy perhaps this loophole will soon be closed. When copper is used as a financing instrument, it is not bought for furnaces but sits in a warehouse, though eventually it could be destined for a furnace but at the expense of future imports.
In which case, the risk of a collapse hasn’t quite dissipated (yet).
Copper’s rise slowed by Chinese oversupply – FT
China’s copper as collateral addiction – FT Alphaville
China’s bonded-warehouse copper mystery – FT Alphaville
Simply amazing commodity collateral shenanigans in China – FT Alphaville