China copper financing deals explained
But early this year, the Voice of America reported , Bangladesh terminated a plan to have a Chinese state-run firm construct a kilometer miles highway from capital Dhaka to its northeast.
That warning came just days after a report by the Center for Global Development, a US-based research nonprofit, warned that eight countries were at serious risk of above-average debt because of Chinese lending. The news that Donald Trump was replacing Tillerson broke just after he returned. Even after swapping debt for equity in its port and giving China a nearly century-long lease, Sri Lanka is struggling with its debts. While the amount was the same as its previous pledge in , it represented a departure from its traditional pattern of doubling or tripling its financial commitments in Africa at each forum.
Nevertheless, the following month saw Sierra Leone cancel plans for a China-funded airport.
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Then the agreement is finalized and the project moves forward. Hruby observed that in Africa, the Chinese are known for moving quickly. And the study itself is not comprehensive, she said, but merely to analyze the cost of the project. The Chinese will do it in two months. She described a dam project that Ghana had with the World Bank that was stalled for about seven years.
They went through a social audit, an environmental audit … which is all good in a way, but a president only has one term, maybe two, and they have to deliver power to the people. By contrast, U. He noted that this activity has given rise to a cadre of professional facilitators of such deals. That is now becoming quite a phenomenon.
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When it comes to hammering out the details of big projects with China, Laryea believes that Africa is often at a disadvantage. He noted that it was critical that African leaders seek out appropriate advisors no matter what country they are dealing with.
Copper price falls on Chinese concerns
Can you help us find another way? They need to get into the game and find a way through. Another shift, said the experts, is that most contracts now stipulate the number of African workers that must be employed on projects. What factors are fueling the continuing negative view of China in Africa?
So there are a lot of other players. She described meetings in which American companies routinely complain about how Chinese companies unfairly grab projects, but in her view these are typically contracts the American firms would turn down anyway. Drug manufacturers who face large settlements from the opioid crisis could follow the Insys example and file for bankruptcy protection, experts say. World Bicycle Relief, a nonprofit organization that builds and distributes bicycles in rural areas of the developing world, is the winner of the Lipman Prize.
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Copper financing scandal in China rocks world market - The Hindu BusinessLine
There are far too many negative perceptions and wrong motives flying around internationally. I really appreciate the efforts of Aubrey Hruby, Wenjie Chen and Thomas Laryea in shining some real light on very relevant topics. We seriously need working together internationally for real truth and factual information rather than negatives that have the wrong influence because of selfish motives in most cases.
Should a and b be enforced, copper financing deals are highly likely to be impacted. That explains China's macro thinking. But what does it mean for the actual Copper Financing Deal?
- Goldman Explains How The China Commodity Unwind Will Happen.
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The below should explain it:. In this section we present an example of how a typical Chinese Copper Financing Deal CCFD works, and then discuss how the various parties involved are affected if the deals are forced to unwind. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.
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- Copper financing scandal in China rocks world market - The Hindu BusinessLine;
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- The scary factors behind copper's price plunge.
Now that it has become apparent that CCFDs and other similar deals do not involve actual shipments of physical material, SAFE appears to be moving to halt them. Step 4 Repeat Step 1-Step 3 as many times as possible, during the period of LC usually 6 months, with range of months. This could be times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be times the value of the physical copper involved, depending on the LC duration.
Copper ownership and hedging : Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price.
As Goldman further explains, the importance of CCFD is " not trivial " - that is an understatement: with the implicit near-infinite rehypothecation in which the number of "circuits" in the deal is only a factor of "the amount of time it takes to clear the paperwork", there may be hundreds of billions, if not more, in leverage resulting from this shadow transaction that has been used in China for years. Now, that loop is about to end. The reality is nobody can predict what the impact will be, but whatever it is - i it will extract tremendous leverage from the system and ii it will have adverse impacts on both China's ability to absorb inflation and grow its economy.
More broadly, Chinese bonded inventories and short-term FX lending has been positively correlated in recent years Exhibit 5. Here we discuss how the different entities A, B, C, D would likely adjust their portfolios to meet the new regulations i. It is not yet clear what happens to the B-list firms in detail once they are categorized as such.
In this scenario, these trade firms would have to sell their liquid assets copper included to fund their LC liabilities accumulated through previous CCFDs. Implications for copper - bonded copper moves from a positive carry asset to negative carry asset. We expect that a complete unwind of CCFDs, everything else equal, is likely to be bearish for copper prices, LME spreads, and bonded premiums. The physical position would be sold if CCFDs unwound and the short futures positions bought back.
The newly available physical copper would not be financed by the China and ex-China interest rate differential anymore not a positive carry asset anymore , and would instead need to be financed by a natural contango in the interim copper becomes a negative carry asset , everything else equal.
Theoretically then, the physical market, over a short period say, one quarter , may need to absorb as much as c. By contrast, the LME futures market would need to absorb buying of c. The impact on the physical market is therefore likely to be relatively large, in spite the fact that an unwind of CCFDs does not result in the creation of new copper i. Since there are no comparable historical examples to make reference to, what happens when CCFDs unwind in practice is open for debate. We believe that since the downward pressure on the physical market is large, both in absolute terms and relative to the upward pressure on the futures market, near-term prices are likely to come under relatively significant pressure.
Further, if the market fears the unwind of CCFDs, physical buyers may hold off on purchases, and futures sellers may bet on lower prices offsetting either in part or more than offsetting the financing deal related unwind buying. In this way it is likely that in practice the whole copper price curve would be under pressure in the case of a complete CCFD unwind, at least until the contango widens sufficiently to compensate for the cost of carry.