China's central bank has introduced a measure intended to stop commodity traders using letters of credit (L/Cs) ostensibly just for copper imports to raise hard to come by credit from banks.

The People's Bank Of China hopes that its measure will reduce the soaring price of copper.

Access to funds

Essentially, commodity traders have been using relatively small amounts of collateral to obtain L/Cs from banks to finance imports of copper. The metal is then sold or used as collateral against yuan loans.

The trader can then employ the proceeds of these sales or loans for whatever purpose until the L/C has to be repaid, which is often a period of several weeks or months.

Credit denied

The new measure stipulates that traders must put up collateral held against L/Cs in low yielding reserve accounts, thereby barring them from using it to obtain loans.

The current spate of using L/Cs to obtain credit from banks dates back to late 2010.

But Chinese traders have used similar tactics before when the amount of credit extended by banks has been restricted (DC World News, 15 July 2008).

Copper prices

Analysts say that copper prices were pushed to a high of close to US$4.50 per pound earlier this year partially as a result of the use of copper imports to raise credit.

Other imported commodities used to obtain bank loans over recent months include soybeans and steel.

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