Last year, financial types used to joke that the answer to any interesting question in finance was either "China" or "hedge funds." With copper, it seems both answers work.
I have next to no knowledge of metals markets, and even less knowledge of the precise trades that got Liu Qibing, a copper trader for China's State Reserve Bureau (SRB), in trouble. But James Areddy's story in today's Wall Street Journal (p.A 14) still caught my attention. Apparently, Chinese traders often arbitraged price differences between London, and Shanghai. Shanghai is the world's second biggest copper market, but it is closed to foreigners. That allowed Chinese traders to take advantage of price differentials between the two markets. Or at least they could until hedge funds started to take interest in cooper, bidding up London prices to the point where the traditional price differential disappeared. Areddy:
This year, a growing trade by hedge funds befuddled the play [the London-Shanghai arbitrage"]. Their aggressive buying of copper in London helped narrow the traditional price gap - all but eliminating the chance to profit on negative arbitrage. .... Even before the botched trades by Mr. Liu, the bureau was under fire in China. It came in for an unusual rebuke from China's national audit bureau in September, around the time rumors of big losses on the London exchange started. It is unclear how big a role Mr. Liu played in designing the aggressive strategy of the China trades, or specifically how heavily the bureau traded the negative-arbitrage play .... Meanwhile the SRB has sent of a number of signals that analysts say are attempts to pull prices lower. Traders calculate it has moved about 40,000 tons of copper to the Shanghai Futures Exchange in the past three weeks ...
Note the qualification: Areddy has no idea "how heavily" the SRB played the negative arbitrage play. But given that I have long been interested in the impact the People's Bank of China has had on the Treasury market (and perhaps the market for Agencies and mortgage backed securities), the broad contours of the story had a certain resonance.
This story also provides me with an opportunity for me to ask a question - has the People's Bank of China ever been known to intervene in the renminbi non-deliverable forward (NDF) market? The NDF typically market is a venue for foreigners to bet on what they think the PBoC will do (One description of the NDF market is "Two english men betting on the outcome of a soccer match in Brazil"). And if a hedge fund bets wrong, why should PBoC care?
That argues against intervention in this market.Yet the PBoC also increasingly cites NDF market as an indicator of market expectations. Which leads to the question of whether or not the PBoC itself participates in setting those expectations. I really have no idea. But it did occur to me that the PBoC might intervene in the NDF market from time to time- and I wonder if anyone who reads this blog might have some insight on this.