Tags: China | shadow | banking | copper

China’s Shadow Banking Seen as Deflating Copper Demand

Tuesday, 29 Jan 2013 08:02 AM

By John Morgan

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Demand for copper, a bellwether metal used in construction and infrastructure expansion, is apparently slumping in China even though the Chinese economy is supposedly recovering. What gives?

According to The Atlantic Media’s Quartz, it’s because copper is becoming an unpopular choice as the collateral for bank financing in China and is likely also being affected by a growing shadow banking trend there.

“We tend to see commodities, particularly copper, being used to get bank credit at times of monetary tightening in China,” Robin Bhar, head of metals research at Societe Generale, told Quartz.

Editor's Note: The Final Turning Predicted for America. See Proof.

“When we talked to people on the ground in China, the conclusion we came to was that copper was imported not for real usage but to be stored in a bonded warehouse, paying no import taxes or customs duties to act as collateral for loans.”

In 2012, Chinese companies struggled to get bank loans because of a large buildup in bad debt in the Chinese economy. The debt was amassed after banks lent a record 17.5 trillion yuan for big infrastructure and property projects. During that credit squeeze, banks required borrowers to pledge something physical to back up loans, and copper was a popular choice.

But the need to back up loans with copper is not as powerful now because credit is suddenly available in China again, Quartz reported.

In China, credit is also being extended from shadowy, off-balance-sheet vehicles referred to as “total social financing,” according to Quartz. The vehicles are marketed to retail investors.

Another shadowy development is China is the rise of “trust companies” that sell risky, securitized loans to insurers and wealthy individuals. The value of trust loans rose 697 percent last December from a year earlier, according to Quartz.

These shadow banking vehicles have few risk-management safeguards, so they have little need for physical collateral such as that offered by copper, Quartz said.

Bahr estimated there are at least 800,000 tons of copper sitting in Chinese warehouses. Quartz noted that the companies holding the copper are likely eager to unload it, which could put downward pressure on copper prices.

Other industry estimates on the outlook for copper are mixed.
Morgan Stanley is forecasting copper prices will advance 7.6 percent in 2013 due to demand from China, the United States and even Europe, and also because of a supply deficit for the metal, according to Bloomberg.

Meanwhile, analysts at integrated copper group Aurubis believe the demand for copper is cloudy in China, MarketWatch reported. Arubus cited the upcoming Chinese New Year celebration on Feb. 10, which includes a two-week holiday break, and the recent bad weather in northern China that have led to project delays as factors that will impact copper prices.

“Overall, the trend in China will only provide some clarity on the copper market after the New Year’s festivities have ended in late February — there won’t be any considerable changes there until then,” Arubus predicted.

Editor's Note: The Final Turning Predicted for America. See Proof.

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