China’s demand for resources is an issue of concern that is impacting business and political relationships around the world – for example the protectionist attitude of the US to CNOOC’s failed bid for Unocal, and in China’s increasing investment in mining and oil in Latin American and Africa. The copper market is just the latest one to feel this impact.
The scandal of China’s State Reserves Bureau (SRB) short selling of copper – which follows similar problems with China Aviation Fuel in Singapore – had an immediate impact on world markets, with copper for three-month delivery rising to a record US$4,243 a ton on the London Metals Exchange. Losses from covering the short positions could reach US$200 to US$300 million
Because of claims that the trader, Liu Qibing, was acting on his own account, brokers on the London Metals Exchange face significant potential risks with possible losses. While due diligence into secretive government organisations is challenging, traders are likely to view Chinese dealings with increased caution, and to press for better corporate governance.
The SRB has started to take action to address concerns, and has so far announced the sale of two lots of 20,000 tons of copper. According to Reuters, citing an SRB official, it has also announced its reserves – 1.3 million tons, which is about 1 million tons more than most estimates.
At the same time, China is continuing the slow process of opening up to the international futures markets with the addition of five domestic companies to a list of 26 that are allowed to “hedge abroad”, or trade on overseas futures exchanges. Eventually China is expected to give foreign brokerages access to domestic markets, but this is expected only after further currency market reform.
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