As China makes its way from basket-case to some kind of neo-capitalist free-for-all, there's always going to be speed bumps. Typically the Chinese are sticklers for rules - lateral thinking and the ability to see the forest for the trees is not usually a strong point. For example, Reuters reports on a ridiculous situation in the commodities futures market:

The Shanghai Futures Exchange has refused to accept Chilean copper as good delivery because the metal no longer carries a duty-paid certificate, merchants said on Friday.

"This is a typically ridiculous Chinese procedure. When you deliver into Shanghai, they ask for a paper showing that you have paid the duty. But because Chilean material is duty-exempt, we don't have those certificates," a London-based merchant said. Since October last year, copper sourced from producers in Chile such as Codelco is exempt from paying China's 2 percent copper import duty, and therefore no duty-paid certificates can be issued.

"The exchange is discussing the problem, and the policy may be changed but at the moment there is nothing we can do," a dealer in Shanghai said..."The situation came up three weeks ago, when the spot premiums for copper fell in Shanghai, prompting merchants to move copper into the exchange's warehouses," the source said. "The exchange is investigating and will make some adjustments soon, but now, it can only abide by recent regulations on delivery."

In recent weeks, copper supplies in China have risen sharply, lifted by record imports and merchants now want to put metal they cannot otherwise sell onto the Shanghai Futures Exchange. The London-based merchant said that holders of Chilean copper were swapping their material for South Korean and Japanese metal in order make good delivery.

China abolishes duty on Chilean copper as part of a free trade agreement, so now that copper is not good for delivery on futures contracts. The obvious solution (waive the requirement for a duty certificate on Chilean copper) is impossible because that would require circumventing existing regulations.

Which goes to prove the rule that regulation will always be slower than markets. This will continue to be a big issue for China as it's economy evolves.

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