By staff reporters Li Qiong and Song Yanhua
A story of intrigue that reads like a movie script -- a rogue trader mysteriously disappears, leaves a financial mess and causes global panic -- has quietly ended in a Beijing courtroom.
Liu Qibing, a dealer in metals futures who made international headlines in 2005 and was caught in an apartment in Yunnan Province after resurfacing a year later, was recently sentenced by a Beijing court to seven years in prison.
Liu bought short positions in copper that resulted in a loss of US＄ 606 million by December 2005, leading to settlements that cost the Chinese government’s State Reserve Bureau (SRB) US＄ 112 million after the agency was forced to create a task force to avert a crisis, and even physically delivering tons of the metal to commodities exchange warehouses in Singapore and South Korea.
Liu’s big gamble and sudden disappearance sent shock waves through the international commodities market three years ago. The secretive nature of SRB and limited information about Liu’s trading whipped up a sea of speculation and rumors. Since then, the Chinese government has kept a tight lid on both the hunt for Liu and SRB’s effort to fill the financial hole he created.
(State Reserve Bureau)
However, Caijing obtained the March 20 judgment issued by the Beijing No. 1 Intermediate Court which described how Liu mishandled deals on the London Metal Exchange -- and why the former star trader received a stiff punishment. The court also found a former government official -- Liu’s ex-supervisor -- guilty of abuse of power and sentenced her to six years behind bars. Both have appealed.
But even in the wake of a criminal investigation and court process, no one really knows the depth of the losses.
One unanswered part of the equation involves the cost China shouldered to replenish copper stocks. Some of the nation’s copper reserves were sold to meet futures contracts manipulated by Liu, forcing the country to buy at much higher prices to rebuild the stockpile.
Foreign securities firms that extended credit to Liu also felt pain. The firms’ representatives came to Beijing in late 2007 to ask the Chinese government to clear Liu’s debt. But after challenging the legal status of the contracts, and showing Liu had forged loan documents using SRB’s name, the government agreed to pay only half the total debt. A source at one lender, a British securities firm, told Caijing that his company wrote off “many, many millions”of U.S. dollars as a result.
But Who Is Liu?
Robin Bhar, a metals analyst at the Swiss investment bank UBS, remembers Liu as a likable guy who spoke fluent English.
With influence over China’s massive copper reserves, Liu’s every move had the potential to shape the domestic market. His strategies were carefully studied and positions closely followed by fellow traders at home.
Liu’s name never appeared on RCSR’s public records, since information about the agency and staff members are highly confidential. But Caijing learned that RCSR hired Liu on in ’94. He must have been doing things right because a year after joining RCSR, he was sent to the London Metal Exchange (LME) for a six-month internship. Liu came back to China with a gilded edge.
In the late 1990s, futures trading was new to China. Liu saw the vacuum as an opportunity and became a key trader for RCSR. He won the right to execute orders through RCSR’s account on the LME board after the government agency decided in 1997 to hedge with copper futures, buying and selling futures contracts simultaneously to offset risks.
According to an SRB official’s testimony at Liu’s court hearing, the agency opened accounts for LME copper trading with several securities firms including British Standard Bank, AMT and Sempra. Liu was in charge of it all. And his absolute power soon led to a fiasco.
Rolling the Dice
In March 2004, Wang Huimin became the first official stunned by the audacity of Liu’s deals. Shortly after being appointed head of the Regulation Center for Supplies Reserves (RCSR), a business enterprise set up by SRB, Wang discovered that 23,000 tons of state copper reserves were missing.
Where did the copper go? Later police charged Liu with selling it and embezzling the money. But how?
As a state agency that oversees strategic reserves and commodities, SRB is not allowed to engage in trading activities. RCSR acts as its proxy, and has authority to occasionally replenish the state’s warehoused reserves. Before selling a commodity, however, RCSR has to sign a purchase contract for an equivalent amount and report the transaction to SRB.
According to court documents, Liu sold the copper that Wang failed to find. He then dumped the proceeds to short-sell copper futures and forged a purchase contract to fool his supervisors. The fake document said RCSR would fulfill its obligations by getting British Standard Bank to sell copper to SRB by a delivery date in December 2005, giving Liu more than a year to maneuver the capital. Meanwhile, the bank was supposed to pay SRB a monthly fee of US＄ 350 per ton.
Since a ton of copper cost US＄ 2,000 in 2004, Liu’s scheme was designed to net him at least US＄ 40 million. And he sorely needed the money, having previously wracked up a huge debt after losing bets on copper prices.
A Desperate Gambler
Liu knew what it was like to win on the copper market. Through accounts bearing the RCSR name, Liu had accurately bet that copper prices would rise. He was right; prices tripled over a five-year period starting in 1999.
Liu thought the price had peaked in early 2004 and would soon turn south. He reversed that call by starting to sell it short, borrowing copper to sell in hopes the price would drop later, which would let him buy less expensive copper to re-supply stocks.
He was wrong. Market prices only continued to climb. With every passing day, the hole in RCSR’s account -- which Liu operated -- got deeper. Eventually, the confident copper trader was seized with panic. He tried to solve the problem by running away.
Liu fled soon after copper prices passed the benchmark US＄ 3,000 per ton in early 2004. His supervisor and mentor Lv Jiafan, however, persuaded him to return to work.
Lv was Wang’s predecessor at RCSR. She promoted the idea of allowing RCSR to hedge futures, and arranged for Liu to attend the LME internship program that helped turn him into a savvy trader.
Before handing Lv her six-year jail term, the Beijing court determined she had given Liu a green light to violate state regulations and speculate on copper futures. Moreover, the court said she concealed the government’s losses after retiring in early 2004, allowing the bogus trade to drag into 2005 and piling losses into the millions of U.S. dollars.
It was Lv who convinced Liu to return to office after his first panic-stricken flight in 2004. How she did that is unknown, but at the time the market, as well as Liu’s luck, seemed to turn for the better.
China tightened macroeconomic controls in early 2004, pushing down domestic demand for commodities. As a result, domestic copper prices slipped in September and October. LME’s copper price fell as much as 10 percent.
As sunlight peaked through the clouds for Liu, the trader came back and tried to recover the losses. But like any desperate gambler, he chose to increase the stake and resort to riskier games. Liu employed a high-risk investment vehicle – the structured option. He hoped a combination of options would win if copper prices dropped. But losses would soar if the price rose.
Copper shot up to US＄ 3,700 per ton by October. Liu disappeared again. And SRB was left with short positions on 200,000 tons, holding a paper loss of US＄ 606 million. News of the Chinese trading debacle traveled around the world.
Shocked and embarrassed officials at SRB reacted by announcing that Liu was not a working member of the SRB staff. They also declared that the government still had 1.3 million tons of copper in stock, disclosing a previously guarded statistic that never had been released.
Behind the scenes, RCSR formed a task force to tackle the crisis. A few months later, four auctions were launched to sell 80,000 tons of copper to Chinese companies -- a move some said was designed to drag down international copper prices, although others guessed that the agency simply needed cash to cover losses.
Meanwhile, as the settlement date for most of positions approached, the task force shipped 66,000 tons of copper to LME’s transaction warehouses in Singapore and South Korea.
According to the court, all the short positions Liu built were closed by April 2007. To settle the deals, SRB released 133,000 tons of reserve copper for auctions and deliveries. In fact, Liu also arbitraged at the domestic market, betting the price to rise to offset risks. His domestic account earned 189 million yuan (US＄ 24 million). SRB’s moves and Liu’s domestic profits helped pare losses originally pegged at US＄ 606 million to US＄ 112 million.
What was lost, however, was more than cash. The huge mismanagement of copper stocks, based on a gamblers’ whims, collided with China’s basic needs. China has to import one-third to half its copper to meet domestic demand.
“China is a net importer of copper,” said an industry insider. “It’s against the nation’s interests to sell such a huge amount.”
Moreover, China’s copper stocks suffered a severe blow. In the end, SRB settled Liu’s accounts and earned the country US＄3.13 million by selling the 133,000 tons of copper. The money was used to cover Liu’s losses. And SRB must have paid a fortune to replenish the stockpile due to the steady price increases.
The trail of disappointments also led to overseas securities firms that loaned money to Liu, such as Sempra Commodities, a branch of Britain’s Sempra Energy and the second largest copper broker at LME.
“We’d been dealing with SRB and its traders for about eight years,” a Sempra legal department source told Caijing recently. Sempra and other lenders dispatched legal teams to Beijing in late 2005 hoping for paybacks from the government. “We stayed in Beijing for three months,” the source said.
Chinese officials successfully argued that the government was only responsible for half the debt, since Liu had forged the loan documents.
None of the lending firms spoke about the actual losses, but the source said Sempra gave up “many, many millions (of U.S. dollars).” The company’s public financial report said 2005 revenues dropped US＄ 126 million -- an amount the source said largely stemmed from bad loans given to Liu.
So how much did the rogue trader actually cost the government, private lenders and China? No one really knows -- and not even Liu, although he’ll have plenty of time to think it over in jail.