Shanghai banks warned of ‘abnormal leverage’ in copper financing

Banks in Shanghai have been told by their local regulator to be stricter in assessing risks from copper financing, market participants told Metal Bulletin.

The notice, which several traders said had been sent to banks in mid-November, did not introduce or hint at any new regulations.

But it suggests that regulators in China continue to monitor the financing trade closely, six months after the State Administration of Foreign Exchange (SAFE) introduced new rules aimed at restricting some aspects of copper financing.

The notice said the value of financing under letters of credit (LCs) had exceeded regular needs, sources who had seen it said.

It cited cases of companies faking their backgrounds in commodities trading in order to qualify for LCs. The SAFE regulations attempt to control arbitrage trading by requiring that companies are involved in physical commodities trading.

The notice advised banks to cut the amount granted under LCs, and be more stringent in determining the companies for which LCs can be granted.

It gave examples of companies being granted LCs worth many multiples of the company’s registered capital, calling this “abnormal”.

And it said the long duration of some LCs, in at least one case more than 700 days, was not reasonable and was likely to facilitate risky behaviour.

The long deferred payment may have encouraged the holders to use the LCs as collateral to receive other loans, or cash them in order to invest in other risk assets, the notice said.

‘Remain robust’
Market participants said the warning from Shanghai’s local banking regulator has not had any immediate effect on copper financing, given that it did not restrict the trade in any way and that a previous effort by SAFE had not affected business as seriously as some had expected.

Also, banks are already granting fewer and less generous letters of credit as they tighten their books as normal before the year-end.

“This notice reflects the regulator’s decision to control the copper financing business, but I think the copper financing business will remain robust,” one domestic trader told Metal Bulletin.

“The effect of SAFE’s document No. 20 this May has eased already: you can see traders are active in doing copper financing, as well as the RMB/US dollar interest arbitrage business,” he added.

Lending generally becomes tighter towards the end of the year in China as banks look to balance their books before reporting their official accounts.

“It is harder to open LCs now, especially LCs with longer deferred payment dates, like 180 days and 360 days. I think this is due to the year-end and that banks are short of capital,” a second trading source based in China told Metal Bulletin.

One major bank was said to have already stopped issuing LCs related to copper after doing internal checks.

“I think the copper financing business will slow down in the year-end period, but after next year’s Spring Festival, a large amount of money will surge into the market and copper financing will rally,” it said.

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