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Brown''s gold sale losses pile up as bullion price surges
By Le-Min Lim
Bloomberg News Service
Monday, November 28, 2005
http://quote.bloomberg.com/apps/news?
pid=10000006&sid=a1x1y3nvHDuU&refer=home
HONG KONG -- Liu Qibing, the Chinese copper trader whose wrong-way
bets left his government with an estimated $300 million in losses,
scored 90 out of 100 in a course on international investing at Wuhan
University.
The son of farmers from the central province of Hubei is now at the
center of a scandal that has reverberated from Beijing to London.
He's under house arrest and hasn't been heard from since mid-
October, a government newspaper reported. Liu, 37, was "low-profile"
during his college days, says classmate Xiong Shenjie.
The case shows disclosure and risk controls at Chinese agencies
haven't kept pace with the economic boom that has made the country
the world's biggest copper consumer and No. 2 oil user, analysts and
traders say. Liu's losses resulted from his "personal actions," an
unidentified government official said in the state-owned China
Daily.
"It's hard to imagine Liu could have done what he did 100 percent
without the knowledge of his superiors," says Gavin Wendt, a
commodities analyst at Fat Prophets Fund Management in
Sydney. "There was some form of negligence. The superiors may think
they can save face by shifting responsibility to one individual."
China's reputation as a commodities trading power also took a hit
last year, when the chief executive officer of China Aviation Oil
(Singapore) Corp., a government-owned fuel supplier, lost $550
million in speculative oil trades. The nation's economy has tripled
in size in the past decade.
"I'm surprised cases like China Aviation Oil and this one don't
happen more often," says Robert Broadfoot, managing director of Hong
Kong-based Political & Economic Risk Consultancy Ltd. "There are a
lot of gray areas among Chinese agencies on who's responsible for
what. It's a faulty system."
Liu, who worked at the State Regulation Center of Supplies Reserve
in Beijing, agreed to sell copper he didn't own on the London Metal
Exchange, betting a drop in prices would let him buy it back more
cheaply. Instead, copper prices rose to a record.
"The loss was a result of his personal actions, instead of the
government," the China Daily reported Nov. 17, citing an
unidentified official at the State Reserve Bureau, on behalf of
which Liu's agency traded. The government hasn't made any direct
statements on the case.
Liu has been under house arrest since mid-October, the Economic
Observer, a state-owned newspaper based in the eastern province of
Shandong, reported Nov. 21, without citing anyone. Phone calls to
the media-relations department of the Public Security Bureau in
Beijing, which oversees the police, weren't answered. Liu didn't
pick up calls to his mobile-phone and home numbers.
An official at the National Development and Reform Commission in
Beijing, which sets the nation's economic policies and reports
directly to the Cabinet, said Nov. 23 that he had no knowledge of
Liu.
"We don't know who this person is," said the official, who works in
the commission's general affairs department and identified himself
only as Zhang. "Why do you want to know about this?" The person who
answered the phone at the commission's media-relations department
declined to comment or give her name.
Even as units such as Liu's exert growing influence in global
markets, they're still controlled by a complex web of government
agencies that have no obligation to disclose information, says Andy
Xie, chief Asia economist at Morgan Stanley in Hong Kong.
"The lack of transparency occurs because the Chinese bureaucracy is
very complicated," Xie says. "When something happens, everyone says
they don't know what's going on."
The State Regulation Center of Supplies Reserve, where Liu worked,
trades on behalf of the State Reserve Bureau, which controls the
government's reserves of materials such as copper. Both fall under
the jurisdiction of the National Development and Reform Commission,
according to the commission's Web site.
Liu's unit escaped scrutiny by the China Securities Regulatory
Commission -- which is charged with monitoring overseas futures
trading by Chinese institutions -- because the National Development
and Reform Commission and the securities regulator are at the same
level in China's government hierarchy.
"There are many unanswered questions surrounding this case," says
Nicholas Lardy, a senior fellow at the Institute for International
Economics in Washington. "China certainly hasn't helped the
situation by giving so little information about what happened and
denying he's a state employee."
A booming economy has fueled China's appetite for natural resources
such as oil and copper, increasing its clout in global commodities
markets. Chinese copper imports rose 27 percent in the three years
to 2004, according to customs figures. The country consumed 3.3
million tons of the metal last year.
"Companies will still deal with the Chinese in the future," says
David Thurtell, a commodity strategist at Commonwealth Bank of
Australia in Sydney. "They are big players, and it's a brave player
who refuses to deal with them. But companies and brokers may demand
deals be confirmed all the way up the line."
Liu has spent his entire career at the State Regulation Center of
Supplies Reserve, which recruited him on graduation from university,
according to classmate Xiong. The agency sent him to London for
training in 1999, the state-run China Securities Journal reported
Nov. 23 on its Web site.
Liu was married in 1996 and has a son in elementary school,
according to Xiong, who last spoke to Liu by phone about two years
ago.
"I was shocked to hear the news," says Xiong, who now works at a
bank in Hubei province. "He was good at sports and calligraphy, and
he had a good personality. He's been quite successful in his career
compared with our other classmates."
Only about one in 100 applicants won a place to study at Wuhan
University in Hubei's provincial capital, and Liu was one of 20
students in his year majoring in world economics, says classmate
Zhang Fangfang.
"Liu was mediocre at the time, no different from the others," says
Zhang, a researcher who hasn't seen Liu since university. "Time must
have changed him a lot."
His trading coups included buying copper in 2002, when it traded at
an average of $1,604 a ton, and selling it two years later, when it
averaged $2,788 a ton, according to Robin Bhar, a metals analyst at
UBS AG in London who's tracked commodities markets for 21 years and
met Liu several times in his previous job with Standard Bank Group
Ltd.
"He was quite a pleasant guy," Bhar says. "Nothing led us to think
he would be facing this situation."
Michael Overlander, chief executive of Sucden (U.K.) Plc, a London-
based commodities brokerage, says Liu was well-known in trading
circles.
"He's the type of guy who was pursued by a lot of brokers in
London," Overlander says. "He was a good client to go after." Sucden
has no exposure to Liu's trades, says company spokesman Tariq Ahmad.
The China Daily reported Nov. 24 that Liu's trades exposed the
government to "hundreds of millions of dollars" in losses. Wang
Zheng, a trader at Shanghai Dalu Futures Co., estimates the losses
at as much as $300 million.
Liu in July and August took short positions on about 130,000 tons of
copper on the London Metal Exchange, agreeing to deliver the metal
by Dec. 21 at $3,300 a ton, the China Daily said. He bet prices
would fall so that delivery could be made with supplies that were
cheaper.
Copper for delivery in three months on the London Metal Exchange has
risen 28 percent since July 1 to $4,236 a metric ton on Nov. 25, as
demand rises and events such as an earthquake in Chile cut supply.
The price rose to a record $4,243 on Nov. 18 because of speculation
China would have to buy copper to cover Liu's trades.
China is selling copper to damp price increases following Liu's
losses. The State Reserve Bureau will sell 20,000 tons of copper in
a third auction this month, the National Development and Reform
Commission said Nov. 23 on its Web site. The same day, copper in
London had its biggest drop in four weeks on speculation China had
rescheduled some deliveries to limit losses on Liu's bets.
Wen Yong, head of the metals department at Shenzhen-based China
International Futures Corp., the nation's biggest futures brokerage,
estimates China has at least 720,000 tons in state copper reserves.
The government doesn't disclose its holdings.
"Delivering the copper should not pose a problem to the Chinese
government," Wen says. "A more pressing question is, how did Liu's
trades go so bad? If the proper checks were in place and they were
faithfully followed, Liu's case shouldn't have happened."
Guo Weidong, a university classmate of Liu's who works at a
securities company in Beijing, says he tried to reach Liu on his
mobile phone after reading the news about him.
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