courier mail article

Copper trade scandal tests China's mettle
Lucy Hornby in Shanghai
17nov05

A COPPER trader for a secretive Chinese government agency has vanished. But more than his whereabouts, traders are seeking clues as to how his employer – and Beijing – will handle the potential fallout.

Liu Qibing, a senior trader working for an entity of China's State Reserves Bureau, hasn't been heard from for a few weeks, since rumours surfaced of a large short position held by his employer in London copper markets.

The position, rumoured to be between 150,000 and 200,000 tonnes, was taken as a bet that copper would fall – just as the industrial metal continued to hit new peaks.

"We all really just want to go up there and pay them a visit, to find out what is really going on," said a Shanghai-based copper trader with a Hong Kong metals trading firm.

"Right now, if the copper market is like a highway, there's a student driver out there driving a tank, and everyone else just wants to get out of the way."

The bureau said Liu was "on leave" and said any short position was undertaken on his behalf and not by the SRB, adding to the uncertainty over whether the bureau is prepared to recognise any obligations.

Although the SRB is immune to public scrutiny – the level of its reserves, its purchases and sales are legally a state secret – it does answer to a stern higher authority.

"How would you like to tell the State Council you have hundreds of millions in losses?" said a trader with a Western firm, referring to China's Cabinet.

The size of the SRB's copper shorts on the London Metal Exchange are estimated by traders at between 150,000 and 200,000 tonnes. Liu headed up its physical and futures trading, traders have said.

Rather atypically, the secretive bureau recently started to openly sell copper on the spot and futures markets, in a move traders view as trying to push down prices and help unwind the position.

The last copper trader to hit the headlines was Sumitomo's Yasuo Hamanaka, who racked up $US2.6 billion ($A3.5 billion) in losses. Nick Leeson lost £791 million ($A1.9 billion) trading Nikkei futures at Barings and was jailed.

Beijing is very concerned about the image of China Inc, as its state-backed companies increasingly list on international stock exchanges or hedge their forex and futures positions abroad.

But cultural factors mitigate against risk-management procedures that could help limit spectacular losses. The hierarchical structure of Chinese firms prevent risk managers from having the authority to face down a trader with a gambling streak, analysts say.

The severe punishment and loss of face for an individual responsible for a loss-making position may also encourage officials to make larger bets rather than close a position to limit losses.

But as the copper scandal bites, China may be forced to more aggressively enforce risk-management practices to help raise confidence in the way it does business.

Reuters