24/7 Wall St.

Ever since the Chinese government began — or at least threatened to begin — imposing restrictions on new bank lending, the country’s businesses have had to get creative in order to get access to additional cash. One interesting way they did this was to acquire a stake in part of the country’s copper stockpile and then use their “ownership” of it as collateral for a new loan.

The government imposed new rules in 2011 to stop the practice, but that did not stop some investors from using the country’s copper stocks to play a game of interest rate arbitrage. Now the Chinese government has issued new capital controls that will end the arbitrage scheme as well.

The main implication of the new controls is lowered demand for copper in China, and, as a consequence, lower copper prices. Bloomberg reports that Goldman Sachs now “sees downside risks to its six-month target of $8,000 a ton and unwound a September-delivery recommendation at a 3 percent loss.”

Copper prices on the London Metal Exchange fell to $7,215 a ton yesterday, largely as a result of the poor showing for Chinese PMI. China consumes about 40% of the world’s copper, and any slowdown in manufacturing or construction is a serious threat to copper prices.

China’s copper stockpiles have declined, which has provided some support for copper prices. But the tighter capital controls combined with the slowing Chinese economy do not support a rosy outlook for copper demand or copper prices.