Asymmetrical Information

The copper in pre-1984 pennies is now worth more than one cent each. 160 pennies to the pound, IIRC.

Over the laest 20 years the correlation between the price of copper this month and the price of oil this month is 0.97 and with the price of oil next month it is still 0.93.

I live nearby a large copper mine (Kennecott Copper Mine, the world's largest hole), and this almost sounds like good news to me (not too sympathetic towards the Chinese government either).
I also have a large jug full of Canadian pennies that I accumulated as a child. All of them post 1970 (so none are worth more than about 0.8 cents American). About $20 Canadian total.

But that's why we love The Economist, right? They make (nearly) everything read like a soap opera. It's delightful.

P.S.: Are you Buttonwood? Could you tell me if you were? I ask because this week's column (wherein the columnist identifies herself as female) is similar in tone to things you have written.

What amazes me about this story is that there is any question whether this fellow was representing the Chinese government or not.
They don't have a paper trail several inches thick?
Why else would they execute such huge trades for him?
Somebody didn't check credentials.

...or perhaps the paper trail goes to the top, and the Chinese government is in passive denial mode while they have damage control meetings.

Are we supposed to read "disappeared" to mean that he took off to Mexico with a briefcase of cash, or to mean he's in some Chineese jail getting bamboo stuck under his fingernails, or to mean he's dead?

more interesting to me; what are the reasonable repercussions if the Chi-comms attempt to welsh on the trades?

obviously, i'd expect them to be expelled from the LME and to be liable to asset seizures in the UK ... but what other, if any, consequences would there be?

It reads like a Liudunnit.

A paper trail won't help if the Chinese Communist Party decides not to pay. And putting pressure on them might result in protests from Western 'business interests', which are so dazzled by the prospect of more than a billion people that they can't see anything else.

So far, China has been allowed to break all the rules. It will be interesting to see who blinks first on this one, since the CCP has to window-dress for the 2008 Olympics and is sitting on a real estate bubble in Shanghai that goes far beyond anything San Diego could dream of. Plus of course China's banks have been making new bad loans at a fast pace for the last decade, added to a banking system that was already technically bankrupt.

But the West will probably cave in since, amazingly, we seem to think that we need China more than it needs us. There were few, if any, repercussions when it was discovered in the 1990s that a Chinese State-Owned Enterprise had murdered children by exporting children's 'pain reliever' containing anti-freeze. Anti-freeze was slightly cheaper and tasted the same. The only drawback was that it led to a painful death, but it wasn't being given to Chinese children.

If deliberately murdering large numbers of foreign children doesn't cause a fuss, then China can surely get away with this as well. Or maybe not - the children that died were poor children in poor countries. Perhaps China will find out that rich people's money is taken more seriously than poor people's lives.

Ann: Could you give a link for that children's pain reliever story, please?

I first heard about the children being poisoned through a 60 Minutes show. They aired the story (I think) in 1997 and then again in July, 1999, which must have been when I saw it. I can't find a link to that show, but the UN Commission on Human Rights looked into the charges (see III.A, starting with 51):

http://www.hri.ca/fortherecord1999/documentation/commission/e-cn4-1999-46.htm

Note that the Chinese government's reponse was that they had not shipped glycerine to Haiti. This is a non-response, since no one ever claimed that they sold it directly to Haiti. The accusation was that they sold it to the Dutch subsidiary (Vos) of a German company (Helm AG). The contaminated glycerine was shipped from China to the Netherlands, and Vos then resold it to Haiti, where it was put in children's medicine.

Here's a quote from the above link:

“51. According to the communication received, from 1996 to 1997 at least 88 children in Haiti died of acute kidney failure after taking the contaminated liquid acetaminophen (trade name: Afebril), often used to fight fevers, made by a pharmaceutical company in Haiti. The Haitian acetaminophen was contaminated with an automobile antifreeze ingredient called diethylene glycol. “

And under 57., it says that "On 14 December 1994, the glycerine arrived in the harbour on board a Chinese freighter."

According to 60 Minutes, Sinochem (the main Chinese chemical and trading company, owned by the government) bought the glycerine from another Chinese company and resold it, certifying it as 98% pure. Sinochem refused to open their records or identify the manufacturer, saying only that it would do its own internal investigation.

The 60 Minutes report showed a mother talking about having given the contaminated medicine to her child. The child didn’t want to take it, but she forced him, telling him it would be good for him. He died a painful death, and she later learned that she had poisoned him by forcing him to take the medicine.

But Clinton didn't want to pressure China, since it was our 'strategic partner'.

Ann -- Sinochem is actually a publicly traded company... but is 70% owned by the govt, much like almost every other large-cap company.

This nonsense going on in Chinese factories isn't limited to foreign-destined products. Last year there was a racket over baby formula that was nothing but chalk and flavor. Hundreds of babies died from malnutrition (feeding more of the chalk quickened the starvation), and the managers have been put to death already, I believe.

Ann, thanks. I'm not a chemist, but I suspect you could get a mix of glycerin and glycol anti-freeze out of the same chemical reaction, so it's a matter of spending the money for purification when the intended use requires it. There might be industrial uses that can work with cheap, low purity glycerin or a mix of glycerin and antifreeze - but medical use requires eliminating the poisonous antifreeze, and reducing all other contaminants, including water, to a specified level.

It sounds like at least half the fault belongs to Vos, the Dutch company that resold and tested the glycerin - but didn't recall it when it turned out to be far, far under medical grade (54% instead of 95%; it isn't clear whether the lab identified that there was also a poisonous contaminant, or whether one would reasonably assume from the report that the other 46% was all water). One question is how the Chinese labeled the glycerin originally? If it was labeled for industrial use only, with the proper grade, then they are in the clear, and It's all Vos's fault, or maybe split between Vos and the Haitian cough syrup company that apparently didn't pay much attention to variation in their raw materals. If the Chinese sold it as 95% nedical grade, then this mislabeling is just as criminal as Vos's ignoring the lab report.

But I agree - why would anyone be surprised to find the mainland Chinese government-industrial complex engaged in crime? Or expect them to be more careful about the lives of foreigners than they are about the lives of their own people? The Chinese have even turned elementary schools into sweatshops manufacturing explosives, and once a school blew up killing many little children.

Where China is concerned, both political parties are guilty of preferential treatment at the behest of big business, which gets all starry-eyed at the concepts of a billion-person market and of factory labor cheaper than slavery. I'm not sure why America's largest business managers don't see the fundamental contradiction in those two expectations of the Chinese trade... Anyhow, the only thing Nixon did right was to open diplomatic relations with China; it was better to have two huge enemies who didn't get along and we could talk to than face them both as a solid bloc. Maybe because of this, the Republicans have ever since been willing to give China a pass on things that get other Communist nations blackballed, like gunning down dissidents, and eventually forgot that while it was useful to play the Soviets and Chinese off against each other, they were both still our enemy. The Dems used to try to kick up a little fuss about Chinese dissidents, but considering their love for other brutal leftist dictatorships they were never in a position to really condemn China, and eventually they swung into line with the big campaign contributions. I think it was Clinton that finally approved "most favored nation" trading status - treating one of the world's most tightly closed economies as if it were a free market capitalist country like the US - but the Repubs haven't ever questioned that.

Sean -

If the managers of the company that put chalk in the baby formula were put to death, then they must not have had very good political connections. "Kill the chicken to scare the monkey" - the problem with their strategy is that the monkeys know that they never get targeted; only the chickens really get punished, regardless of who's responsible.

But I totally agree that the atrocities that have been allowed in their system haven't only, or even primarily, affected foreigners. All the more reason why we should speak up, for their sake as well as ours.

markm -

I agree that the company in the Netherlands that resold the glycerine was also responsible - there's plenty of blame to go around. but the 60 Minutes report and other accounts claimed that Sinochem certified it as 98% pure. And, if Sinochem and the ultimate manufacturer were blameless in all this, why thwart the investigation? The mere fact that they refused to answer questions or help to determine what went wrong (and that the US didn't press them on it) implies that they had something to hide.

And, markm, I totally agree that politicians on both sides have been guilty of being too friendly to China, driven partly by wildly unrealistic business interests. I taught at a business school in Hong Kong for many years in the 1990s, and people there were willing to deal with the Chinese Communist Party but were far more realistic about what to expect. It was Westerners, particularly Americans, that were painfully naive and willing to believe that China had changed. Not only did Western businesses generally lose money in China, but they twisted our foreign policy in the process.

Although Republicans as well as Democrats have been guilty of cozying up to the butchers of Beijing, Clinton deserves special mention. He led the drive to provide military and dual-use technology to the Chinese military, and he (and the Democratic National Committee) appears to have taken money from them.

The 'most favored nation' decision was watched closely in Hong Kong, since their prosperity hung in the balance, and I think it was a turning point in Clinton's attitudes on China, human rights and foreign affairs in general. When running for office, Clinton accused Bush of having been too soft on China. Once in office, he demanded some progress on human rights if China wanted MFN status. China totally refused to do even a little of the usual window-dressing.

In their bid for the Olympics, China was happy to release a few political dissidents (on probation or house arrest) a couple of years early. They always rounded them up again later, when the heat was off, but the Western press still ate it up. For MFN against Clinton, China did absolutely nothing. Everyone in Hong Kong was watching and worrying - how could Clinton ignore such a strong challenge?

Clinton backed down completely, and afterwards he was careful not to let human rights get in the way of potential business interests. China challenged him, and he backed down. But after all, few in the US even noticed, except for businesses that make campaign contributions to those that overlook human rights.

Sorry for so many long posts on this, but I watched all this carefully at the time, and it's not fair to imply that all politicians have been equally friendly to the Chinese Communist Party. Clinton was an extreme.

The LME is a futures market with standardized contracts and contracted delivery dates.

Mr. Liu sold those contracts, establishing his short position, and IF the contracts are taken to [what is called] delivery, then he or his backer (China) would be expected to ante up the copper. The normal way to deal with that is to close the transaction before delivery by buying contracts on LME to close out the short position.

It was this buying of contracts to close Mr. Liu's short position (presuming that Mr. Liu/China didn't plan on deliverying the copper as contracted) that caused the price for copper on the December contract to spike up.

The article appears to presume that China is going to go to delivery (or repudiate the actions of Mr. Liu). In any other case, closing out the contracts would generate the kind of losses detailed in the article as China would have to buy contracts to close out the sold contracts. Right now, China's brokerage margin accounts must be in sad shape.

IF China had the capacity to deliver that much copper AND said (credibly) that it was going to deliver (no idea how it would convey that), then the contract price would probably drop back significantly. In fact, the price might drop below normal prices as many holders of the contracts (the long position) would want to get out and not take delivery of the copper. In this particular hypothetical situation it could come down to a game of poker, who folds first.

markm-

Glycerine is manufactured from fats and oils (triglycerides); it is a big side-product of the soap industry.

Diethylene glycol is made from ethylene, a petrochemical. Automotive antifreeze is mostly ethylene glycol. Diethylene glycol is used in brake fluid and aviation antifreeze. Both are toxic. Propylene glycol, OTOH, is edible and used for things like antifreeze in camper plumbing, and in medicines.

After reading the UN report, it looks like the Chinese blew it a little, the Dutch blew it big time and everyone's in CYA mode. This is what happens when you try to cut corners in the pharma industry: you kill people.

Personal experience (and yes, I'm a chemist): any starting material you get for a medicine needs to be really, really pure and if it's not, going forward with it is a travesty. Starting material purchased from the lowest bidder is going to be automatically suspect. Matter of fact, there's no guarantee that starting material from the HIGHEST bidder is going to be pure. Best to check it right off the bat.

I don't think you can blame the Chinese for anything other than old-fashioned caveat emptor and CYA. And I love me an opportunity to bash the PRC.

First I totally agree that the Dutch company was heavily to blame, also. In something like this, I don't think the guilt of one somehow exonerates another. And it always seemed to me to have been less pre-meditated on the Dutch side, although perhaps I misunderstood how easily glycerine can happen to turn deadly, by accident.

Maybe Lab Rat or someone else that understands the process could explain - could the manufacturer have genuinely meant to produce glycerine, but it just happened to turn into diethylene glycol, something that looked and tasted the same but was much cheaper to produce?

Based on the few details available, it was reported that they found more of this stuff still in warehouses in the Netherlands and were able to test it. Sinochem certified it as 98% pure, and they found that it was something like 54%, without it having been processed by anyone else. Does this just happen when relatively pure glycerine is left sitting in containers for a while? If so, then maybe it wasn't deliberate on the Chinese side, which changes the degree of guilt considerably.

But if Sinochem certified and sold it without testing, or tested but dumped the stuff anyway, I don't see how Sinochem can be less guilty than Vos. And if the manufacturer deliberately produced and sold a deadly product just to save some money, then I think they're most to blame. And I think the parents of the dead children should have been given answers.

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