For months now, copper traders in China have been nervously watching a mountain of inventory piling up in bonded warehouses in Shanghai as Chinese businesses use imports of the metal tofinance unrelated projects in a tight credit market. But it’s not just copper that’s involved in the imports-for-financing deals.
As traders and analysts told Dow Jones Newswires recently, soybeans have also emerged as a roundabout way for China’s business to raise cash.
The logic of the deals runs the same way in both cases. Trading companies became involved in lucrative development projects, usually real estate deals. To finance the loans for these longer-term projects, they’re getting banks to issue letters of credit – often interest-free in the case of soybeans – against commodity imports, which are then dumped for cash to roll over the larger debt.
It’s a way to circumvent a tighter credit environment. It’s also a dangerous bet.
In the case of soybeans, supply fundamentals highlight the risks. Soy processing margins have been negative for a large portion of this year, mostly because the government is intent on holding down cooking-oil prices and has ordered price caps on downstream producers of the household good. Global prices across the soft commodity complex have sagged on expectations of sufficient supply. Meanwhile, soybean inventories at Chinese ports have risen to a record level of nearly 7 million tons. Official forecasts say large soybean imports continue to be scheduled throughout this month.
In the case of copper, a lot of the import-for-financing stocks are held tax-free in bonded warehouses, and then released to overseas markets when traders see export opportunity. That’s one reason why imports this year have been rising even as the price of foreign copper ran high above domestic prices.
For soybeans, there’s no such thing as a bonded warehouse, so import-for-financing traders simply dump the shipment as fast as they can, meaning the supply is transferred immediately to the domestic soybean market with little heed to actual demand. “That’s why Shandong soybean port prices are always 20 to 30 yuan lower than spot levels,” one executive from a state grain trading company told Dow Jones.
If they’re lucky, and monetary tightening runs a short course, the trading companies involved in these import-for-financing schemes will have made good on their gamble. But if inflation rises and tightening accelerates, these companies may find themselves in a hole, as falling commodity prices – partly of their own creation – push them ever deeper into debt.