The study finds that about 700,000 Mt. of copper is warehoused in Shanghai for financing purposes; that is equivalent to 40% of China's net refined copper demand.
FT/Alphaville explains how the financing works:
". . .the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.
Initially, via a letter of credit, and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40%–80% of total bonded stocks. Our estimates are toward the upper end of this range.
Property developers (or the property developing arms of conglomerates) appear to be behind the lion's share of this type of activity, driven by unwillingness by domestic banks to extend finance or the imposition of interest rates of anything from 10%–20% when they do. On that basis, interest rates on metal of LIBOR + cost of funding look very attractive indeed.