China has offered a yuan-denominated copper futures contract open to foreign traders – a move seen as a bid to win the LME dominance opening prize for red metal trading.
It is also a clear indication that China is pressing ahead with plans to fully internationalize the yuan.
Beijing wants to be a price maker, not a price maker, especially when it is largely dependent on imports for any commodity.
It should be assumed that its ultimate goal is for the yuan to dominate trading in copper, not the dollar.
News reports quoted copper suppliers expecting to trade in yuan instead of dollars on the right track.
In 20 years, China has grown from consuming 12% of the world’s copper supply to using more than half of it now.
The Shanghai Trade Contract is not the city’s first copper tool – it is the first international contract.
While the current copper contract that was put in place was tradable by Chinese investors only, the new contract will be available to foreigners, bringing in a greater number of deals.
While Beijing’s other attempts to gain a foothold in commodity trade – a yuan denominated crude oil futures contract, the Shanghai Gold Exchange and iron ore contracts traded in the northern city of Dalian – progressed, this is the first project in the LME area..
As one can see, China – which has managed to master the processing of many commodities (think graphite, rare earths, tungsten, tin, and antimony, among many) – is now clearly looking at controlling the supply and circulation of commodities.
The new copper contract is traded through the Shanghai International Energy Exchange (INE), which is the exchange that also manages trading in Chinese crude oil futures. .
Copper traded under the new futures contract will be exempt from taxes and customs duties – with the copper having to be delivered to customs warehouses, just as the LME does.
The INE crude contract clearly showed China the potential to engage in the international futures market.
While still lagging behind West Texas Intermediate (WTI) and Brent Crude benchmarks in terms of market influence, contract circulation has increased significantly in its first two years of operation and attracted foreign participants.
However, China accounts for only 15% of global crude oil consumption. This may be one of the reasons why the INE crude contract is still a small player, as many other Asian countries are still operating on WTI or Brent crude as oil price guidelines.. .
The country’s influence on copper is likely to grow to a much greater extent than its influence on crude oil.
Not only does this move give China some pricing power, it is just the largest importer in the world, it also broadens the international role of the yuan (and reduces the role of the US dollar to the same degree).
It is also beneficial that the nickname « Dr. Cooper » gives the red metal a particularly high profile as investors use it to assess economic health..
One commentator described the new copper contract as « the country’s first, and perhaps most exciting, attempt in the international futures market. ».
This is because of its influence on the yuan as an international currency, which is just as vital to Beijing as its ability to put a cap on copper prices..
China wants to increase the convertibility of the yuan, which is why it needs what a banker described as « providing deep markets and liquidity for financial products. ».
The yuan is equal to the US dollar in international markets is a top priority of the Chinese leadership.
It is wholly owned by HKex, the operator of the Hong Kong Stock Exchange and Hong Kong Futures Exchange headquartered in Hong Kong.
As we have seen in the past few months, Beijing is tightening its control over Hong Kong’s politics and economy.
Copper, China, LME, Commodities
World News – African Union – China takes the first step towards controlling the global copper market