* Chinese private investment funds build up big short
positions - sources
* Perfect storm created for selling last Friday - analyst
* No big unwinding of Chinese copper financing deals seen -
By Polly Yam, Fayen Wong and Melanie Burton
HONG KONG/SHANGHAI/SYDNEY, March 13 Chinese
funds taking massive short positions played a powerful role in
copper's slide to around four-year lows this week, signalling
the growing force of the sector in global commodities markets.
The funds had been building up bets against copper since
December, according to sources at funds, futures dealers and
analysts, in a market already edgy over slowing Chinese demand
and fears that credit upheaval in the world's second-biggest
economy could unwind financing deals using the metal as
On Friday, funds and other speculators pounced and sold
London Metal Exchange and Shanghai copper contracts heavily as
they took advantage of worries over the Chinese credit market
after a bond default by a solar equipment producer.
The scale of the sell off shows that Chinese funds are
gaining greater sway over global commodity markets -- influence
that is likely to grow given China's intention to liberalise the
yuan and pilot projects for free trade zones.
China has about 700 private funds managing about 300 billion
yuan ($48.82 billion), according to data provided by fund
research firm Z-Ben Advisors. Some invest in both commodities
futures and equities markets.
Secretive and backed by wealthy individuals, many do not
have an online presence.
The funds focused purely on commodities are clustered around
Shanghai and nearby provinces. According to brokerage sources,
hedge funds active in China's copper futures market include
Zhejiang Dunhe Investment Co, Flowinvest China Commodities
Trading, Yihui Investment and the aptly named Shanghai Chaos
"Many hedge funds have been bearish on the copper market for
a while and have been waiting for the right time to enter," said
Lian Zheng, a senior analyst from Xinhu Futures Ltd in China.
Soft Chinese economic data, weak demand, soaring copper
stocks and a lack of new policies to spark demand at
parliament's annual meeting this week darkened the mood, while
the default of Chaori Solar triggered the "perfect storm", he
London copper has lost nearly 10 percent in a week
and hit a 44-month low at $6,376.25 per tonne on Wednesday,
before recovering a touch to $6,443. Shanghai copper
traded at 44,410 yuan ($7,200) a tonne on Thursday, not far from
4-1/2 year lows.
"Prices could fall further because there are still many
investors wanting to short the market," said Lian of Xinhu
Suggestions that the selling was driven by bets of falling
prices can be seen in Shanghai Futures Exchange data that shows
as prices slumped by 11 percent from March 7 to 4-1/2 year lows,
open interest, or new positions surged by 30 percent.
"We certainly hold short positions...at least for the first
half of the year," said a source at a Chinese fund, who declined
to be named because he was not authorised to talk to the media.
The fund held short positions on the LME and in Shanghai but
the source said it would consider changing these if demand
improved or copper prices were near the production costs of
large global miners.
Chinese copper miners have also lifted hedging in Shanghai
for their ore production to protect against possible price
drops, increasing short positions, two mining sources said.
China is the world's top consumer of refined copper,
accounting for about 40 percent of demand, but growth has slowed
since last year and a global surplus of the metal is expected in
Traders estimate more than half of copper imports into China
were to raise funds using the metal as collateral over the past
two years, hence the market concern over the impact of Beijing's
efforts to control credit conditions and rein in shadow banking.
But tighter credit markets or falling prices were unlikely
to cause widespread problems in financing deals because they
were structured around 90-180 day letters of credit, which means
they are not affected by short-term price moves, said Sijin
Cheng, an analyst with Barclays in Singapore.
"It's not like it's a margin call business and they're being
forced to liquidate. It's usually a repurchasing agreement where
both sides are hedged, so all the costs are known ahead of time
and locked in," said Cheng.
Traders who structure financing deals said selling of copper
was due to speculators not breaches of financing deals.
"Speculators are the main driver. We haven't heard anything
about defaults," said a source at a trading house in Shanghai.
In a typical copper financing deal, an importer puts down
nearly the full value of the copper in yuan as a deposit to a
bank for a letter of credit.
The importer resells the copper into the domestic market to
raise cash that can be used for other investments such as real
The importer can also strike a hedged deal where the metal
is stored in a bonded warehouse in China or overseas in return
for a loan from a foreign bank. In both cases, the importers no
longer are exposed to the copper price.
Since the bulk of financing copper stocks has been hedged
on the LME, importers have retained stocks for the most part,
traders said. But some small importers who were not fully hedged
had to sell bonded stocks in China this week, adding to pressure
($1 = 6.1450 Chinese Yuan)
(Editing by Ed Davies)