Regulator goes on offensive over hedge funds
With China losing its battle to bring down world copper prices, the country's top banking regulator warned that institutions would have to be better prepared to face the destructive power of international hedge funds.
Liu Mingkang, chairman of the China Banking Regulatory Commission, told a conference in Beijing this week a heavy price had been paid for scandals from Barings Bank and Enron Corp to fiascos involving China Aviation Oil and the central copper reserves.
It was the first time a senior official had mentioned the case of Liu Qibing, a trader with the State Reserve Bureau who is believed to have taken short positions equal to about 130,000 tonnes of copper in July and August at about US$3,300 a tonne, expecting the price to decline.
Copper hit a record of US$4,478 a tonne on the London Metal Exchange on Friday and closed at US$4,374 on Monday.
At current prices, the bureau faces a loss of about US$1,100 per tonne, about 18 per cent higher than in October, when rumours of Liu Qibing's trading began to circulate. This shows the bureau's tactic of selling copper at auction and moving stock to LME warehouses in Asia has failed to bring down the price.
Spot copper prices in China are at record levels - above 40,000 yuan a tonne - as market participants expect tight supply at home because of poor response to the copper auctions.
'The squeeze has worked,' a copper trader in Shanghai said. 'The bureau has lost. It is likely to arrange more auctions but the hedge funds are not giving up. The moral of this story is that you cannot bet against the market.'
Liu Mingkang said hedge funds had enormous capital at their disposal that could be moved without notice and at great speed, eroding confidence in the market.
'Their destructive movements can cause market chaos and bring risk. Many are registered offshore, lacking sufficient information and financial transparency, making them hard to regulate,' he said.
'The market risk is extremely high because the funds lack risk management and evaluation. Some involve money laundering and fraud.'
The banking regulator has set up a special committee to collect information about the funds and will formulate transparency standards for the banking industry.
In addition, it is telling mainland institutions to prepare to react under pressure, such as by having enough funds, and is encouraging dialogues with those working in the funds to better understand how they work.
'It has become an urgent issue - how to understand market risks in a scientific and objective way and come up with creative solutions,' Mr Liu said.
Wang Guansu, a copper analyst at Star Futures, said of the bureau fiasco: 'The lesson from this is the same as with China Aviation Oil, that we do not have a good regulatory system, including control of risk management within companies.'
In November last year, China Aviation Oil lost more than US$500 million from speculative trading in oil options and sought court protection from its creditors.
