China Mulls Tougher Rules On Commodity Trading For Key Firms

(Bloomberg) -- China has proposed tougher-than-expected rules on commodities trading by its state-owned giants, as Beijing seek to tackle hidden risks in the world's biggest raw materials market. 

The government is gathering feedback from some of the country's top state-run energy, metals and food companies on draft regulations that aim to guard against fraud and halt what officials view as wasteful financial activities, according to people familiar with the matter.

The rules would apply to the sprawling Chinese industrial groups — such as Sinopec and China Minmetals Corp. — that are controlled by the central government. 

They would be banned from commodity trades unrelated to their core business, or which aren't tied to underlying physical shipments, the people said, asking not to be identified as the matter is private. The rules would also prohibit so-called closed-loop trading, under which related entities trade with each other, booking profit multiple times on the same cargo.

The proposals ramp up a push by authorities that's reshaping a sector hit by a series of high-profile fraud cases in recent years. More broadly, the government wants to curb ways of trading that take profit away from productive parts of the economy, ultimately hurting consumers.

READ: China Spooks Commodity Traders With Probes Into Shady Deals

These proposals don't cover province-level SOEs, or the private sector, where many such trading activities remain widespread. But the proposed rules are more stringent than anticipated, the people familiar said.   

The State-Owned Assets Supervision and Administration Committee, which oversees central SOEs, didn't immediately reply to a faxed request for comment.

Risky Business

There's been a series of high-profile global commodities trading scandals in recent years. Aurubis AG, the Europe's largest copper producer, revealed last week it has uncovered a large-scale fraud involving its raw materials supplies, with potential losses running into hundreds of millions of euros. A major nickel fraud ensnared trading giant Trafigura Group last year.

The proposed requirement to link any trades with an underlying physical material might bear relation to two cases that rattled China's commodity markets.

In August 2022, several Chinese merchants — mostly state-owned firms — found that a domestic copper trader wasn't actually holding nearly $500 million worth of ore that was meant to be their collateral. Several months earlier, another group of traders claimed that they were duped into providing credit against fictitious quantities of aluminum. 

READ: What's Behind a String of Scandals in Metals Trading?: QuickTake

SASAC called a meeting last month with several of the central SOEs to discuss the proposals, the traders said. The draft rule specifies that any non-compliant trades found after Sept. 30 this year will result in immediate dismissal for the company official responsible.

Other details from the draft rules include:

• A ban on conducting off-warrant trades
• Companies are forbidden from trades that deviate significantly from average levels
• Companies should strictly control their number of trading units, and merge those that have similar business

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