Secretive Chinese funds: a potent force in copper rout – by Polly Yam, Fayen Wong and Melanie Burton (Reuters India – March 13, 2014)

HONG KONG/SHANGHAI/SYDNEY, March 13 (Reuters) – Chinese funds taking massive short positions played a powerful role in copper’s slide to around four-year lows this week, signalling the growing force of the sector in global commodities markets.

The funds had been building up bets against copper since December, according to sources at funds, futures dealers and analysts, in a market already edgy over slowing Chinese demand and fears that credit upheaval in the world’s second-biggest economy could unwind financing deals using the metal as collateral.

On Friday, funds and other speculators pounced and sold London Metal Exchange and Shanghai copper contracts heavily as they took advantage of worries over the Chinese credit market after a bond default by a solar equipment producer.

The scale of the sell off shows that Chinese funds are gaining greater sway over global commodity markets — influence that is likely to grow given China’s intention to liberalise the yuan and pilot projects for free trade zones.

China has about 700 private funds managing about 300 billion yuan ($48.82 billion), according to data provided by fund research firm Z-Ben Advisors. Some invest in both commodities futures and equities markets.

Secretive and backed by wealthy individuals, many do not have an online presence.

The funds focused purely on commodities are clustered around Shanghai and nearby provinces. According to brokerage sources, hedge funds active in China’s copper futures market include Zhejiang Dunhe Investment Co, Flowinvest China Commodities Trading, Yihui Investment and the aptly named Shanghai Chaos Investment Co.

“Many hedge funds have been bearish on the copper market for a while and have been waiting for the right time to enter,” said Lian Zheng, a senior analyst from Xinhu Futures Ltd in China.

Soft Chinese economic data, weak demand, soaring copper stocks and a lack of new policies to spark demand at parliament’s annual meeting this week darkened the mood, while the default of Chaori Solar triggered the “perfect storm”, he added.

London copper has lost nearly 10 percent in a week and hit a 44-month low at $6,376.25 per tonne on Wednesday, before recovering a touch to $6,443. Shanghai copper traded at 44,410 yuan ($7,200) a tonne on Thursday, not far from 4-1/2 year lows.

“Prices could fall further because there are still many investors wanting to short the market,” said Lian of Xinhu Futures.

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