A relatively important development in the Chinese copper collateral scheme via the Bloomberg wire on Tuesday (H/T Sean Corrigan):
Feb. 28 (Bloomberg) — Some Chinese banks have stopped approving loans to companies using warehouse receipts of copper as a pledge, the Oriental Morning Post reported today, citing an unidentified executive at a state-owned bank. Approval will only be given to companies that have fixed buyers of downstream products, the newspaper said, citing the bank executive. The suspension came after banks found that companies used the same collateral to apply for loans from more than one bank, posing risks amid volatile metal prices, according to the report.
As we’ve reported on FT Alphaville, it’s hard to know exactly how extensive the overuse of copper collateral for bank loans has been in China. And also to what degree it’s been responsible for encumbering large sums of copper in dark inventory stores invisible to the official LME-monitored market.
Anecdotal reports suggest that the practice has been a key provider of additional liquidity into the Chinese system for more than a year. Importantly too, they suggest the practice has had a major false demand effect on copper prices themselves.
Whether Chinese banks are reining in such lending, or becoming more scrupulous about the way in which they make these loans, it’s probably worth watching the copper price either way:
Related links:
China’s bonded-warehouse copper mystery – FT Alphaville
China’s copper as collateral addiction - FT Alphaville
Copper’s rise slowed by Chinese oversupply - FT
Simply amazing commodity collateral shenanigans in China - FT Alphaville