(Reuters) - Trading companies operating in Shanghai's free trade zone are likely to cut back on using copper imports as a financing tool as they are now allowed to borrow from overseas banks more freely, trading sources said.
Traders said the reduction would further hit China's imports of copper, which dropped off after Chinese banks tightened credit in the second half of last year amid probes of an alleged metal financing scam.
More than 50 percent of China's refined copper imports in 2012-2013 were linked to financing deals, according to traders.
The refined copper imports still hit a record in 2014 due to increased term shipments and state purchases, but weak spot buys cut the inflows by more than 9 percent in the second half from the first half.
China's central bank (www.pbc.gov.cn) said on Thursday that companies in the Shanghai free trade zone would now be allowed freer access to financing from abroad.
"We used copper trade for transferring funds in and out of Shanghai. Now we don't need copper any more because we can transfer money directly to and from our subsidiary," said an executive at an Asian trading house with a subsidiary operating in the trade zone.
The executive said he expected bonded copper stocks in the zone to fall because of fewer financing deals. He declined to be named because he was not authorized to talk to media.
Last year's drop-off in China's copper imports in the second-half of the year was a drag on the metal's prices , which fell about a quarter by the end of January from a five-month peak hit in July.
Many metal-trading companies moved into the zone looking for a freer trading environment after Beijing started it up in 2013 to try and gradually open the Chinese market.
Like importers outside the zone, these traders imported copper, nickel and zinc , storing the metals in bonded warehouses as collateral for cheaper short-term loans from foreign banks.
U.S. dollar loans from Hong Kong banks are charged annual interest rates of about 1.5-2 percent, compared to more than 5 percent for yuan loans in the domestic market, said the Asian trading house executive.
More loans from aboard would cut demand for yuan loans in the China's domestic market, which could force Chinese banks to lower lending rates, said a trader at a state-owned trading company operating in the zone.