China May Fail to Honor Copper Market Losses

If one relies solely on the American business media, one is almost assured ignorance of a major rogue trader scandal involving the Chinese government, the London Metal Exchange and the rising price of copper. The Chinese government is facing nine-digit losses, and they’ve gone so far as to deny the existence of Liu Qibing, the trader who bet wrong. The truly paranoid might presume the American press is ignoring the story while Mr. Bush visits the alleged Communists in Beijing. More likely, this is a case of ignoring a story because no Americans are involved – yet.

Back in April, Mr. Liu, who works as a trader for the Chinese State Reserve Bureau (a body that manages the government’s supplies of raw materials like copper) decided that copper prices were going to fall. He shorted copper futures, meaning he sold copper for December delivery that he didn’t actually possess and which he could acquire before December to close out the transaction. Thus, if the price dropped between April and December, he’d make a profit for the Communist Government of the People’s Republic by speculating in the copper market (Karl Marx is spinning in his grave).

However, the price of copper didn’t fall, meaning that the SRB stands to lose on every ton of the 100,000 to 200,000 tons Mr. Liu sold. Global stockpiles are about 140,000 tons. So, this is a big damn deal. The SRB’s facing losses or $100 million according to some analysts.

So, the Reds have decided to lie about the whole thing. First, they denied that Mr. Liu even existed. But there are lots of traders on the London Metal Exchange who know him, so the story changed. “As far as I know, the loss was a result of his personal actions, instead of the government’s,” a bureaucrat at the SRB told the English-language China Daily. Reading between the lines, that means the Chinese government isn’t going to honor its commitments. They’ve also been dumping copper from government stockpiles to put Mr. Liu’s position in the money.

Quite why the PRC government, which is sitting of billions of dollars worth of US Treasuries, feels the need to worry about $100 million (or whatever the bill comes to be) is hard to say. Failing to honor its financial commitments will have repercussions far beyond the copper market (like in negotiations over North Korean nukes, peace in the Taiwan Straits and elsewhere). The next delivery date is December 21, when a lot of light will be shed on just what Mr. Liu did. And who knows, by then, maybe, someone in the US business media will figure out that there’s a big story here.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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