In the first 50 years of its history, China’s State Reserve Bureau was able to fulfil its vital but mundane role of stockpiling critical raw materials such as copper discreetly and without attracting much attention outside of the markets it bought from.
But ten years ago, the SRB was thrust into the global spotlight after it emerged that a trader it indirectly employed had lost the agency hundreds of millions of dollars betting against rising copper prices on the London Metal Exchange.
The story of how Liu Qibing – a rising star within the SRB’s State Regulation Centre of Supplies Reserves (SRCSR) – bet against the copper market and lost had all the drama of a spy novel. It caught the attention of global markets and media, who in line with the Chinese authorities then characterised it as China’s first rogue trading scandal.
With the world looking on, the usually secretive SRB was forced to take extraordinary steps to cut the losses it had incurred, including by selling physical copper that had been stockpiled specifically and exclusively to protect the functioning of China’s military and industry in a national emergency.
Liu ultimately paid a heavy price for the financial losses and the embarrassment his trading caused, but the scandal also spurred a root-and-branch restructuring of the organisation, and this continues to affect how the agency operates in metals markets today, many years after the scandal dropped off the global news agenda.
Following the arrest of Liu Qibing, the SRCSR was shut down and betting on futures and derivatives was banned; ties with foreign traders and brokers were cut, and the agency retreated back into the shadows to focus on its core objective of physical stockpiling.
In a series of articles that will be published this week and next, Metal Bulletin will take an in-depth look at the SRB, starting with a definitive account of the Liu Qibing affair by Andrea Hotter, who worked around the clock on the story as a newswire reporter ten years ago.
More than simply marking the anniversary of those events, Hotter’s article offers a complex and complete portrait of the infamous Liu, and recounts for the first time how an internal power struggle within the SRCSR may have contributed to his downfall.
It also provides a fly-on-the-wall account of brokers’ fraught efforts to force the SRB to make good on Liu’s exposure, which, Hotter reveals, was far larger than market participants thought at the time.
However, in Metal Bulletin’s view, the ten-year anniversary of the Liu Qibing affair does not only provide an opportune moment to look back at the history of the SRB.
As copper prices skidded to six-year lows in January and again in July, the question of whether the SRB would add to its stockpile became a key point of contention, as market participants questioned whether prices had hit the floor, or whether the rout had further to run.
Indeed, by the end of the month, rumours were circulating in China that the SRB had ordered about 50,000 tonnes from producers after copper skidded towards $5,000 per tonne, although Copper Price Briefing could not widely corroborate the reports by the time of publication.
As the largest single potential buyer of marginal spot tonnages, the SRB can balance out a surplus market or pull it into deficit if it decides to embark on a swing buying campaign.
But what drives its decisions to buy? Is any purchase purely determined by price, and if so, what is the trigger point for purchases? Or conversely, does the need to build a stockpile trump strict commercial ambitions to buy at the bottom of the market?
When it does decide to buy, who does it approach? How do its suppliers seek to conceal the identity of their counterparty, and what signs do market participants look for when attempting to foil those efforts?
In this series, Metal Bulletin is seeking to answer these and several other questions that the market comes back to time and again as metal prices fall.
Finally, in light of the Chinese state’s recent disclosures about its holdings of oil and gold, Metal Bulletin also considers this is a timely moment to look beyond the history and present state of the SRB, to ask whether the agency might in the future become more transparent about its activities in the metals markets.
The government’s decision to publish details about its oil and gold inventories comes as China looks to play a more formal role in institutions that bridge the gap between politics and commerce in international commodities and currency markets.
In publishing its gold holdings, China moves a step closer to adding the renminbi to the International Monetary Fund’s special drawing right mechanism; by disclosing its oil stocks, the government is meeting a precondition of membership to the International Energy Agency.
In metals, publishing inventory information would provide no such upside for China, but president Xi Jinping’s government-wide crackdown on corruption has nevertheless led to a shift in the way that the organisation interacts with its counterparties and the wider market.
With a new team leading the SRB, information about its purchases is trickling into the market slightly more freely, but how far along the road to transparency will the SRB and the organs of state it reports to be willing to go?
Metal Bulletin will consider this question, along with many other enduring questions about the SRB, in the days to come.
To read Andrea Hotter's account of the Liu Qibing affair, click here.
For more information about how the SRB’s purchasing campaigns have been structured, and which companies have been involved in supplying material to the SRB, look out for Metal Bulletin’s next article in this series, which will be published on Friday July 31.
If you can’t wait that long, read our full special report “China's SRB revealed: Shedding light on the State Reserve Bureau” below. This in-depth exposé gives you everything you need to know about the SRB and what it means for the copper market. Including:
• How much copper has the SRB bought
• How war and Cold War have shaped state stockpiling agencies
• Shedding light on China's State Reserve Bureau
• The analyst view on SRB stocks
• The Liu Qibing 'rogue trader' copper scandal
• Who does the SRB work with?
Subscribers can read the full report here.
If you’re not a subscriber you can have this special report plus full access to the Metal Bulletin site by claiming a 7-day FREE trial of Metal Bulletin by clicking here.