Letters of credit (L/Cs) opened for commodity trades are being used by Chinese companies in inventory financings that raise funds for a variety of short-term investment opportunities.

A variety of base metals and commodities - particularly copper - are used in such financings.

Delayed payment

In inventory financings, companies are essentially taking advantage of the delayed payment facilities available in L/C transactions.

The companies simply buy commodities on L/C terms and sell their purchases on delivery.

High yielding assets

The proceeds from sales are then invested in high yielding assets until the due date for the L/C payment arrives. Companies commonly negotiate L/Cs on 180-day terms.

Commodity analysts say the practice is making it difficult to assess the true market for base metals.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.