* "Hot money" inflows driven partly by financing
* Up to 1 mln tonnes of copper held in the deals-analysts
* Yuan's fall has made deals less profitable
By Susan Thomas
LONDON, April 16 The top names in global mining,
gathered in Chile last week, publicly shrugged off concerns that
copper financing deals in China, that have locked up mountains
of metal, could unravel.
To be sure there is no question that the deals that have
locked up as much as 1 million tonnes of copper will unravel
soon, releasing an avalanche of metal on to the market.
But there are signs that Beijing is homing in on the murky
and lucrative sector, and that the economic climate that enabled
them is changing. Private talk among the metals men at their
annual Santiago CESCO/CRU conference showed traces of unease.
China's first corporate bond default in March precipitated
a sharp sell-off in copper on worries that it signaled a
reassessment of credit risk in a market where even high-yielding
debt had been seen as carrying an implicit state guarantee.
The price of the metal has since made a modest recovery, but
the episode highlighted the copper industry's dependence on
China, which accounts for more than 40 percent of global demand.
"Hot money" inflows into China, which were mostly driven by
commodity financing deals and black market activity, accounted
for one-third of growth in China's money supply last year,
Goldman Sachs analyst Max Layton said in Santiago.
"So a big chunk of the growth in Chinese money supply...is
actually due to the import of cheap foreign funding on the back
of copper, gold, soya beans, iron ore and other commodities," he
Each year China imports roughly 5 million tonnes of copper.
Imports rose 10.8 percent to 420,000 tonnes in March from
While there are no statistics on tonnage held in financing
deals, analysts estimates range from 250,000 tonnes to 1 million
tonnes that are being used as collateral. Layton reckons the
figure at around 600,000 tonnes.
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 estate.
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.
"It's not in the government's control and it has a big
impact on money supply growth. That's one reason why it's
unlikely the government is going to allow it to continue
indefinitely," Layton said.
Equally, though, Beijing would not want a rapid unwinding
of the financing deals for the same reason: it would slash money
MONEY SUPPLY GROWTH WEAKENS
In March, China's money supply grew at the weakest pace in
more than a decade, data showed on Tuesday, another sign of
softening economic momentum, with analysts saying a fall in the
yuan looked to have slowed capital inflows and the build-up of
foreign exchange reserves.
The yuan fell some 2.7 percent against the dollar in the
first quarter, nearly erasing all of its gains last year.
Currency traders and analysts said the sharp fall was
engineered by the central bank as a way of introducing risk and
curbing speculation on what had been seen as a one-way bet.
The yuan has risen 33 percent since its landmark revaluation
in 2005, supported by factors such as strong capital inflows,
playing in investors' favour for financing deals. As they import
copper, they earn the value of the currency's appreciation.
"Financing deals are still profitable because you've still
got the profits coming through from interest rate differentials
between the U.S. dollar rate and the higher Chinese RNB
(renminbi) rate," Thomson Reuters GFMS senior analyst Rob Smith
"We don't see a collapse or significant unwinding of these
deals. But what we may see going forward perhaps are lessening
of the deals."
A weaker currency is another reason why the deals are likely
to eventually unwind.
The Chinese central bank guided the yuan to depreciate a net
2.54 percent in February and March, its biggest two-month loss
since China established the domestic foreign exchange market in
1994, in a sudden move to deter speculators who had bet on the
non-stop yuan appreciation.
"The fast ramp up (in financing deals) that we saw is going
to slow, the RNB depreciation makes the cost of funding them
much higher," Macquarie analyst Colin Hamilton said.
On the whole, Hamilton does not expect financing deals to
unravel, but acknowledged that they are a worry to mining
companies because it is not something they can control.
China has up to $160 billion of outstanding loans using
commodities as collateral, about 31 percent of its short-term
foreign exchange loans, according to Goldman Sachs.
Beijing's moves to tighten access to credit has led to
buyers defaulting on about $300 million of soybean imports in
For the moment though, a weak copper price, growing surplus
of the metal and tepid demand are at the forefront of miners'
"There are other things that worry me far more than
financing deals," said an executive at a major mining company on
the sidelines of a conference in Santiago last week. "But I'm
definitely starting to take an interest in them."
(Editing by William Hardy)