Copper falls on China woes
Copper is headed for a third in a row week of losses because of the weak economic data in China and the risk of bond defaults spreading in the world’s biggest consumer of commodities. The metal, trading near a 44-month low on the London Metal Exchange, fell 5.5% this week, the most since April.
There is a rising market concern that more corporate defaults will follow after Shanghai Chaori Solar Energy this month became the first domestic bond default. According to the Reuters report, Chinese banks may cut loans to industries by about 20%. Economists say this it will be healthy for the Chinese economy, but in a short term its is causing some market turmoil.
Investors worry that a series of corporate defaults could collapse the popular method of financing linked to copper. Chinese companies used to import copper to secure loans at low interest rates by using the metal as collateral. The borrowed money were then used to fund business operations or even to invest in higher yielding assets.
As a result of new corporate defaults large amounts of copper would be sold into a market. Commodity currencies could come under a strong selling pressure.
Chart. May copper futures.