China has tightened rules on repatriating foreign currency from re-export of copper stored in bonded warehouses, which industry sources said on Wednesday could lead to more supplies from the stocks being sold domestically, crimping import demand.
Chinese firms, effective April 1, are required to leave foreign currency earnings from re-exports in pending accounts and not allowed to convert into yuan until they receive receipts of import payments and re-export incomes, according to a notice posted on the State Administration of Foreign Exchange website on March 30.
Analysts said the new rule affects investors that had imported copper using dollar-denominated letters of credit and hoped to resell the metal as a way to avoid tight credit in China by using the yuan earned to fund development projects.
"The most important thing for Chinese firms now is cash," said Jing Chuan, chief researcher at Hua Tai Great Wall Futures. But Chinese copper prices have stayed below LME prices, prompting investors to store the metal in bonded warehouses to avoid a local 17 percent value-added tax. The premium stood about 1,270 yuan a tonne on Wednesday.
Stock owners typically pay the VAT and sell the copper in the domestic market if prices are higher than import costs. They also trade the stocks or re-export the metal duty-free More than 600,000 tonnes of bonded copper are now in such pending position in Shanghai, of which more than 200,000 tonnes may be owned by investors, trading sources estimated.
A trading source said some investors may sell bonded copper regardless of the prices as they want the cash and others may cancel partial term copper imports for this year. Other metals such as aluminium stocks stored in bonded warehouses are also affected by the new rules.