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Mark O'Neill

Official report points finger at accountability muddle as reserve body fights losses

China's copper futures scandal has uncovered a regulatory black hole which, according to a report yesterday,  showed the trader involved was making enormous deals without apparent supervision.

In the first official account of the debacle, the China Securities Journal revealed personal details of the trader, Liu Qibing, and claimed he was working alone in an office of the National Control Centre (NCC) when the deals were struck for the State Reserve Bureau.

The report contradicts earlier claims by industry insiders who said because of the bureaucracy involved, it would have been unlikely that Mr Liu was a 'rogue trader'.

In July and August, Mr Liu took short positions equal to about 130,000 tonnes of copper at US$3,300 a tonne, expecting the price to decline. It is now trading at more than  US$4,200, exposing the government to losses of hundreds of millions of dollars when the contracts fall due on December 21.

Today the reserves bureau holds its second copper auction in a week, a move seemingly intended to force copper prices lower and reduce losses stemming from Mr Liu's short position.

Industry players speculated yesterday that bureau officials probably were pressuring brokers involved in the deals to talk with counterparties to mutually unwind some contracts.

In addition to forcing spot copper prices lower through physical sales, this policy of 'moral suasion' formed the other part of the bureau's likely strategy, they said.

After the losses became known, it was revealed that the bureau is not governed by the China Securities Regulatory Commission (CSRC), unlike the 31 state trading firms that have been approved to conduct overseas futures trades. Instead, it falls within the purview of the National Development and Reform Commission, which ranks equal to the CSRC.

The China Securities Journal report said Mr Liu, 36, one of the most accomplished futures traders in China,  had graduated in 1990 with a degree in international finance from Wuhan University and  gone to work for the bureau.

After six months training in London in 1995, he returned to a job  at the NCC, set up in August 1994 to conduct trading on the bureau's behalf. He made his name by forecasting a rise in the copper price and betting heavily on it, earning tens of millions of dollars for the centre and becoming head of its import-export division.

Mr Liu operated from an office on the ninth floor of the Oriental Building in Lujiazui, Shanghai's financial district. He set up the computer network between the London Metal Exchange and the NCC. The office had two people authorised to trade but late last year the second trader was transferred to another department, leaving Mr Liu on his own.

The report added that as his office came directly within the ambit of the National Development and Reform Commission, it gave credence to statements by the bureau that he was not working for it.  However, the question of who was responsible for him is still open.

After the short positions came to light, Mr Liu was removed from his job and has kept a low profile.

'The bureau's job is to regulate supplies and control prices and future trade is an effective tool for this,' said Hu Yuyue, a director of the stocks and futures research centre at Beijing Industrial and Commercial University. 'To do this, it needs a comprehensive system and risk control mechanism.'

The general manager of the Beijing Derain Information & Consultancy,   Li Lei, said  the key issue was who was doing what and what the system of regulation was. 'How to avoid rat trading, how to audit, how to supervise the traders - these are all questions that  must be answered,' he insisted.

At the second China Copper Conference yesterday  foreign speakers refrained from talking about Mr Liu for fear of embarrassing their hosts and best customers.

Asked about Mr Liu, Liu Jijun, the general manager of strategy and planning at Minmetals, said he  knew only what he had read on the internet and could not comment.

James Liang, a copper analyst from Zhejiang, said Mr Liu's head  would not be enough and that a more senior official would have to resign to take responsibility. 'Legally, the bureau could repudiate the debt but I do not think it will. It is a question of China's credibility. In any event, China is too important a buyer. People have to continue selling to her,' Mr Liang said.

In his speech, Simon Heale, chief executive of the London Metal Exchange, avoided any mention of Mr Liu.



Copper trader worked 'unsupervised'