**Abstract**
Will Tongma follow in the footsteps of steel trade? Industry experts currently do not agree with this idea: "Financing copper" is very different from steel trade financing, and the likelihood of a sharp drop in copper prices causing a collapse is not high. However, banks are showing growing concern. According to reports from traders, Construction Bank and Industrial Bank have started to tighten credit for copper trading. Banks in Shanghai, Zhejiang, Hebei, and Guangdong have also stopped issuing letters of credit for copper traders operating in bonded areas. This move may signal trouble for "financing copper."
The head of the Shanghai branch of the Construction Bank stated that the bank is now more cautious about new copper trade loans. In contrast, the Industrial Bank Shanghai Branch denied the reports, claiming there has been no tightening on copper trade loans in the region.
**Letter of Credit “Loop Openâ€**
From a financing perspective, "financing copper" differs significantly from the previous boom in steel trade financing. Steel trade typically involved mortgage-backed loans, often with repeated collateral. In contrast, "financing copper" relies on letter of credit transactions, with fewer instances of repeated mortgages.
According to what reporters understand, the process usually works like this: A copper trading company signs an import contract with a foreign supplier and applies for a letter of credit from the bank. Once the letter is issued, the bank pays the foreign seller. The trader then has 180 days to repay the bank before the letter expires. During this time, the imported copper is sold in the domestic market at competitive prices, allowing the trader to generate cash. Since the letter of credit hasn't expired yet, it effectively functions as a short-term loan. As it nears expiration, the trader can apply for a new one, maintaining a continuous cycle if they have a good relationship with the bank. Thus, the funds remain in the hands of traders.
A trader explained the system using an analogy. Imagine two companies, A and B. Company A buys copper and sells it to B, who then uses a letter of credit to transfer it to C. This process can be repeated multiple times, with the same batch of goods being used to open several letters of credit. With Shanghai and other regions tightening credit controls, many companies have moved to banks in Jiangsu and Zhejiang to issue letters of credit—but with stricter oversight, this process has become increasingly difficult.
**Why Is Copper Financing Popular?**
In fact, whether it's "financing copper," "financing glue," or other forms of commodity-based financing, it essentially involves borrowing money or arbitrage. When market funds are tight—such as during interest rate hikes or increased deposit reserve requirements—and the local currency appreciates, copper financing becomes attractive.
At the end of 2012, for example, the renminbi was on an appreciation path, and tight market conditions made copper financing popular. At that time, copper stockpiles in bonded warehouses reached 1 million tons.
Although copper financing can result in import losses, the maximum loss per ton in 2012 was around 4,200 yuan, with an average annual loss of about 2,000 yuan. Despite these losses, there was still a profit margin due to high interest rates.
A leaflet from a Copper Foreign Trade Financial Salon highlighted that the cost of copper financing is much lower than traditional market financing. One document stated, “Focus on the cost of copper financing, which exceeds 6 billion U.S. dollars. The cost is between 6% and 7%, much lower than formal bank loans.â€
Moreover, the funds obtained through copper financing are not always used for production or operations but are often directed toward high-yield sectors such as real estate, trusts, or underground financial institutions. During periods of tight funding in 2011 and 2012, these projects could yield over 30% annually, making copper financing highly profitable.
**50 Billion in Potential Bad Debts**
According to GF Securities, the scale of high-risk copper trade in China could reach 50 billion yuan. If the capital chain breaks down, the banking sector could face tens of billions in non-performing loans.
Li Youhuan, director of the Guangdong Provincial Social Science Comprehensive Development Research Center, told reporters that trade finance has a long history and is well-established internationally. Without it, international trade would be unimaginable. However, China’s trade finance differs significantly from the standard models seen globally. “Financing copper†and “financing glue†are just forms of trade finance, and any product can be used for financing—though “financing copper†is particularly prominent.
“While the risk of a sudden outflow of bad loans from copper trade is not high in the short term, copper prices are declining, though not as volatile as steel trade,†said a CITIC analyst.
However, Xu Yili, a well-known financial commentator, believes that “financing copper†has become a hidden crisis in foreign trade. “Considering the high probability of the dollar strengthening, it’s safe to say that a ‘financing copper’ crisis is just a matter of time.â€
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