The Chinese authorities are clamping down on letters of credit (L/Cs) used for commodity trades.

Already, L/Cs for copper trades are being refused, and the authorities are considering a similar ban for trades in other commodities.

Cheaper credit

According to market sources, banks have already been instructed not to issue L/Cs for copper trades.

Chinese buyers had been using L/Cs to buy copper, and then using this as collateral for offshore bank loans at lower interest rates than those offered by mainland Chinese banks.

Nickel next?

Bank sources say that the authorities are now likely to tighten up on the rules for obtaining L/Cs for nickel purchases.

This would be the latest in a series of measures introduced by the Chinese authorities in their efforts to ensure that L/Cs are only used for genuine commodity trades.

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