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New China Stumbles Into Old-Fashioned Trade Scandal
Losses on Copper Futures Have Leadership Spinning

By Peter S. Goodman
Washington Post Foreign Service
Friday, November 25, 2005

HO CHI MINH CITY, Vietnam, Nov. 24 -- China on Thursday acknowledged that a since-detained government trader placed a series of disastrous bets on the price of copper in London this summer, leaving the state to cover hundreds of millions of dollars in losses, according to a report in official Chinese media.

As rumors of the scandal filtered out this month, China first denied the existence of the trader, and then branded him a rogue operator. Thursday's report in the official China Daily newspaper suggests that the Communist Party-led government has resolved to take responsibility for a scandal that has roiled commodity markets while renewing fundamental questions about the transparency of the fast-growing economy.

China's fortunes and those of the global economy are increasingly intertwined, with decisions made by rulers in Beijing and traders in Shanghai rippling out to markets from New York to Tokyo. Once bent on self-sufficiency, China has in recent years developed a voracious appetite for raw materials, becoming the world's largest buyer of copper, iron ore and steel, as well as the second-largest purchaser of oil. This month copper prices soared to record levels on the assumption that China will eventually have to buy large quantities to square its accounts after the trading debacle.

In its Thursday edition, China Daily reported that a trader named Liu Qibing, working for the National Control Center of the State Reserve Board -- a central government body that stockpiles commodities for the country's industrialization -- shorted copper on the London futures exchange, meaning that he bet that prices would fall.

"But prices kept rising, exposing the government to losses of hundreds of millions of dollars," the report noted.

In recent days, China has been selling large volumes of copper in a bid to drive prices down to contain the scale of the losses. "The auctions were triggered by the misjudgment of trader Liu Qibing," the report said, adding the state plans to sell an additional 20,000 tons next week.

In financial circles, China's copper calamity evokes a similar episode nearly a decade ago, when a trader at Japan's Sumitomo Bank lost $1.5 billion by buying huge volumes of copper in anticipation of a price spike, only to see it plummet. Some recall Nick Leeson, whose $1 billion in losses on the Tokyo stock market in the mid-1990s brought down Barings, the venerable British merchant bank.

But where Leeson was a highflying renegade, Liu Qibing, 36, a career Communist Party functionary, seems an unlikely maverick capitalist. Since graduating from Wuhan University in his native province of Hubei in 1990, he has worked at the National Control Centre, an institution that dates back to China's central planning days, according to a report in the China Securities Journal.

After a training stint in London, he returned to the agency in 1995. He later set up a computer network that allowed him to place trades on the London Metals Exchange from his office in Shanghai.

Liu soon amassed a reputation as a savvy navigator of the markets. According to Hong Kong's South China Morning Post, he netted the state more than $300 million by betting on a sharp appreciation in the price of copper between 2002 and 2004, correctly assuming that the country's construction boom would translate into escalating demand.

But this year, he got it wrong, underscoring the difficulties of forecasting in an economy that is increasingly capitalist yet still subject to the often secret dictates of its Communist Party leaders.

Liu began betting on a drop in the copper price this past spring, when China's central bank was preventing state banks from lending to real estate developers to prevent inflation. He figured the policy would continue, keeping the clamps on development and limiting the demand for copper. However, under pressure from local governments demanding development, the central bank again turned on the lending taps. A new wave of construction commenced, and with it a surge of demand for copper for wiring in a country that now absorbs roughly one-fifth of the worldwide supply. The price has risen by roughly one-third this year.

"So much is still controlled not by market forces, but by government decisions in terms of opening and closing the floodgates of credit," said Arthur Kroeber, managing editor of the China Economic Quarterly. "There is no mechanism for communicating these decisions, even in an indirect way, to the market."

Liu's bet was placed via futures contracts -- an agreement to deliver a certain amount of copper in December at a fixed price. Had the price dropped, Liu could have bought what he needed at the lower price, delivered the agreed-upon amount, and pocketed the difference. The rising price meant that he would have to shell out extra for the copper he was obligated to deliver.

In July and August, when the price was at about $3,300 per ton, Liu agreed to sell roughly 130,000 tons for delivery in December, according to China Daily. This week, copper for delivery in December was trading above $4,200 per ton. Total losses have previously been estimated at $60 million to $200 million.

As the price of copper climbed, Liu's supervisors apparently pressured him to double his bets in hopes that an eventual drop in the price would erase his losses, lest they provoke scrutiny from higher up, said a source familiar with the case. A merely bad bet ballooned into a disaster.

"There's definitely no chance it was Liu's personal decision," said Huang Xiao, an analyst at Beijing Capital Futures Co. Ltd. "Trading activities like this by a state arm are not like those in some Western countries, operating in a completely market environment. This is supposed to be a nonprofit state unit that helps stabilize the price and supply of raw materials. They are not supposed to be engaged in speculation for profit. He could not have done that alone."

The first public signs of trouble emerged in mid-November, as traders in London told local financial reporters that a Chinese counterpart had built up a large short position in copper, and had then disappeared: Liu had not been heard from in several weeks. The rumors pushed up the price of copper on the London futures board, as traders bet that eventually China would start buying to make good on Liu's contracts.

At first, China's State Reserve Board denied that it had a trader named Liu Qibing. Later, it acknowledged Liu's existence and the bet he had made against copper, but it insisted that those trades were his individual concern.

As the pressure mounted last week, with trading sessions pushing copper to record prices, China branded Liu a rogue trader, raising the possibility that Beijing would not make good on the contracts, but would let traders in London swallow the losses.

"Initial investigation found that Mr. Liu alone should be blamed for the loss," said a Nov. 17 report in the China Daily. The same day, the official New China News Agency quoted an unidentified State Reserve Board official: "We haven't seen this person for a long time."

Four days later, the government signaled that it might take responsibility. A report from the state agency said China had begun stockpiling copper in Shanghai in case it had to transfer large volumes to the London market to cover Liu's bad trades.

The same day, the state-supervised Economic Observer newspaper reported that Liu had been held in custody for unspecified "irregularities" since the middle of October. Much like the details of his rise and fall, his whereabouts were unknown.

Special correspondent Eva Woo contributed to this report from Shanghai.

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