Speculators in China who reckon to be dealing in copper are still using letters of credit (L/Cs) to obtain credit at preferential rates.

This is despite measures introduced by the authorities in an attempt to stop such practices.

Better rates

In the first part of 2011, it became clear that China's commodity traders had discovered ways to use L/Cs to obtain credit at much lower rates or on better terms than a conventional bank loan.

Some so-called copper traders began using relatively small amounts of collateral to obtain L/Cs from banks to finance imports of copper. The metal was then sold or used as collateral against yuan loans.

Failed measures

New measures introduced by the central bank in August 2011 were meant to stop such practices and stipulated that traders must put up collateral held against L/Cs in low-yielding reserve accounts, thereby barring them from using them to obtain loans. (DC World News, 31 August 2011).

But an analyst working for a western bank with operations in China has now told the Reuters news agency that traders are still using L/Cs, apparently for copper trades, to obtain preferential credit terms or rates.

Current practices

The analyst said the latest version of using L/Cs for such purposes involves manipulating the different rates and terms attached to the burgeoning variety of L/Cs that can now be denominated in either yuan or US dollars.

Some traders apparently obtain an L/C from one bank, pledge it to another bank and borrow against it from a third bank to take advantage of the wide range of different rates available, the analyst suggested.

Nothing new

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).

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