China tax authorities rattle metal market with invoice crackdown

[BEIJING] A sweeping crackdown by China’s tax authorities is rattling traders in the world’s biggest metals market, with many firms grappling with severe reductions in invoicing quotas that underpin their trading activities.

China has stepped up its scrutiny of so-called circular invoicing deals, where related parties execute trades between themselves and use the invoices to obtain bank funding. The State Taxation Administration said on Friday (Apr 24) that it has intensified oversight of the practice to target fraudulent trading activity that has artificially inflated economic growth.

The probe has ensnared a broad group of traders dealing in copper, aluminium and silver in Shanghai, according to several affected parties, who asked not to be identified because the information is private. Many have had to pause business as local tax authorities carry out stringent compliance checks.

Tax authorities are not seeking to stymie legitimate trading, but market participants fear they may have overtightened their quotas, affecting real-world flows. As the crackdown spread to Shanghai this month, many firms have already used up their invoice allowances, hitting a significant portion of spot trading activity in the city, one of the traders said.

China’s State Taxation Administration did not immediately respond to a fax seeking comments.

While the latest crackdown targets a range of industries including building materials, chemicals and road freight, the copper market has been hit particularly hard, the sources said. Invoices are often used to obtain short-term financing from banks in commodities markets, and a high value and deeply liquid market make copper particularly attractive for the purpose.

The quota cuts apply to some large state-owned commodity merchants, international traders and private domestic distributors, the sources said. Many of them have paused their businesses to reassess risks and rethink commercial plans for the rest of this year, while waiting for local tax officials to give them fresh invoice allowances.

Physical trading activities have already slowed down. Some traders that have copper shipments arriving next month now find themselves unable to issue receipts to their suppliers, while others said that they have not seen any offers and bids for days. Activity in the spot market, where people buy and sell copper cargoes to take advantage of arbitrages between domestic and foreign prices, has completely dried up for several trading houses, some of the sources said.

Spot copper trading volumes across China fell to a daily average of 24,925 tonnes as at Thursday this week, dropping almost every week this month and down 22 per cent from as high as 31,920 tonnes a day during March weeks, according to data from researcher Mysteel Global, citing survey of smelters, traders and fabricators. It attributed the decline partly to tightening invoice availability.

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Invoices are essential to complete a sale in China. Companies need them to book revenue, claim value-added tax credits, and make transactions legally valid. In commodities trading, invoices also act as proof of ownership and are often used to obtain short-term financing from banks.

In recent years, China has been cracking down on inflated sales and on deals being executed simply to access bank loans, because these trades are not servicing underlying demand for metals, and work against the government’s goal of directing funds to the real economy.

The campaign targeting this so-called “invoice economy” has gathered pace in recent months. The practice has undermined fair market competition and fragmented the unified national market, the country’s national taxation bureau said on Friday. Efforts to curb such irregular trades have shown initial results, with total invoiced value falling 7.1 per cent for wholesale coal trades and 5.7 per cent for metals during the first quarter.

Traders expect monthly invoicing quotas for affected firms to continue tightening in the coming months, with a possible easing only in the second half of the year. Reduced trading activity could hamper purchases by Chinese manufacturers, the sources said.

So far, industrial consumers such as fabricators that buy copper and aluminium for processing have been less affected by the crackdown, but buying has already cooled since domestic refined copper prices rose above 100,000 yuan (S$18,643) a tonne.

Chinese buyers scooped up large volumes after prices dropped below that threshold in March, contributing to a newly bullish mood among traders and analysts. BLOOMBERG