London 25/01/2016 - Chinese authorities are clamping down on cross-border currency arbitrage and the use of overseas warehouse receipts for transit or re-export trade, which is seen lifting demand for metal for storage in Shanghai's bonded zone.
The renminbi-dollar exchange rate differs in the onshore and offshore markets. The yuan in mainland China (CNY) is closely controlled by Beijing and trades in a narrow range while the offshore yuan (CNH) fluctuates to a much larger degree, offering arbitrage opportunities. Traders have been able to capture these using copper as collateral.
But China's central bank is trying to combat the huge outflow of the yuan to prevent further weakening of the currency, last week ordering commercial banks on the country's coast to carry out full investigations for all re-export trade affecting yuan capital pools.
"Now the process is stricter - they are now checking the authenticity of re-export trades to prevent the outflow of the renminbi," a Chinese trader said.
Shanghai has been the centre of the move so far - this is where around 60 percent of re-export business takes place, a Shanghai-based physical trader said.
"So far it has been mostly in Shanghai and the surrounding provinces but it might spread to other regions in China," another trader said.
Banks must also ensure that yuan-denominated capital pools do not exceed the size of those pools at any given time, according to a Reuters report.
Capital outflows from China in 2015 exceeded $1 trillion, according to Bloomberg Intelligence - the highest since 2006 - amid concerns about the direction of PBoC currency policy and its ability to defend the value of the yuan.
Holders of warehouse receipts are now trying to transfer their metal to domestic warehouses, a consumer source in China said.
"We used to do re-export business using overseas warehouse receipts but it has now been forbidden," he said.
China's central bank may already have been in touch with the country's banks informally and checked the location of stocks, one warehouse source suggested.
Premiums in Shanghai's bonded zone climbed to $90-100 per tonne as of last week - a favourable arbitrage between the LME and SHFE has encouraged imports while the spot market has tightened.
(Editing by Mark Shaw)