A handful of Chinese banks have stopped issuing letters of credit (L/Cs) for copper imports, according to Shanghai's National Business Daily.

The move responds to pressure from government on banks not to support practices in which L/Cs are obtained, ostensibly for copper imports, but are then used as tools to take advantage of financial market discrepancies.

Ghost trades

Some trading companies have reportedly created L/C transactions in which copper is not shipped.

Instead, the transaction is used to take advantage of interest-rate arbitrage between China, where interest rates on loans are higher than those charged for L/Cs for copper transactions.

Economic damage

Other supposed copper traders have been obtaining L/Cs from banks outside China in foreign currencies, including the US dollar, and then bringing these funds into the country to invest in higher-yielding yuan-denominated assets.

This practice is thought to be contributing to gains in the Chinese yuan.

Figures distorted

Meanwhile, the volume of copper imports recorded in China's trade figures are thought to massively overstated.

Some analysts say that the bulk of purported copper imports in the official data do not exist.

They say the figures are distorted by the widespread practice of using supposed metal transactions in schemes such as those described above.

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