If you want a reality check on China's economy, look no further than the copper market. It's a story that reads more like a spy novel than financial news: A few weeks back, markets buzzed with rumors as Liu Qibing, a well-known metals trader for China's government, went missing. It happened amid talk someone had taken a huge short position - selling copper futures in a bet prices would fall - and was losing big as the market went the other way. The government at first denied Liu even worked for it.

All this had trading pits buzzing with questions. Was China facing massive losses? Might it default on trading commitments? Was Liu under house arrest in Beijing? Could China be forced for the first time to disclose its copper holdings? Would it dump copper to drive down prices and cut its losses? Whither metals prices?

Yet these questions, tantalizing as they are, miss the real story - what the copper mess says about China's economy.

China's economy is the world's sexiest, as evidenced by the gold-rush mentality driving investors, executives and pundits the world over to get a piece of the action. Less chronicled is the growing tension between China's move toward market economics and the socialism it is struggling to leave behind.

The government responded to Liu's wrong-way trade in true Chinese fashion, with opacity. First, it denied being caught in a short position. Then it turned around and tried to talk down the copper market, as if traders wouldn't see through such efforts.

What's at stake here is China's credibility as a financial trading partner, and that's a huge problem. Liu, after all, traded for the State Reserve Bureau, the agency that stockpiles commodities to feed China's industrialization. Regardless of how this affair turns out, China needs to continue amassing the gamut of commodities to fuel its economy. That will be harder without the trust of suppliers and markets.

Investors, too. One barometer of China's challenges is the stock market. While stock indexes don't always correlate with gross domestic product, how could the benchmark Shanghai Composite index be down more than 12 percent this year amid 9 percent growth?

Inadequate corporate transparency and governance get much of the blame. One also has to look at China's rickety financial system, which is weighed down by hundreds of billions of dollars of bad loans.

The bureau may become the second Chinese state-owned trader to fall into financial woes in a year. In November 2004, China Aviation Oil (Singapore) sought protection from creditors after it ran up $555 million of debt from trading oil derivatives. The company bet prices would fall; instead, they rose to a record.

The copper controversy is an even more jarring reminder that the standard of Chinese corporate and financial dealing needs to be upgraded, and fast. It's also a microcosm of how the state stands in the way of China's economic maturity.

Big questions remain about the lines of accountability in Beijing and the relationships between government agencies. Simply put, the role of the Chinese state remains undefined.

That's why Chinese officials shouldn't have been surprised that markets were skeptical it has 1.3 million tons of stockpiled copper. Ren Yunhe, an analyst at Shanghai Shenyin Wanguo Research and Consulting, summed it up well: "The people who believe that are rather few. It's a rather large amount."

Even if China has on its hands a rogue trader akin to Nick Leeson, the Singapore-based trader who caused the collapse of Barings in 1995, it still needs to honor its commitments.

The Japanese trading house Sumitomo paid up when its copper trader Yasuo Hamanaka ran up a $2.6 billion loss in the copper market. Should China fail to make good on Liu's trades, it would in some ways be akin to defaulting on debt. Some economies survive on selling debt, some on buying commodities. China is in the latter camp.

Governments should always be honest about their facts and figures - especially those overseeing the world's biggest economies. The muddled and mismanaged response to Liu's copper trading seems at odds with a nation that wants a leading role in the global financial system.

While not an obvious comparison, all this seems reminiscent of China's botched handling of SARS in 2003. Beijing tried to shield its economy from negative publicity and hid its epidemic, putting exports before public safety. Only after the world cried foul did China come clean.

A huge price will be paid if China doesn't embrace the transparency investors expect. The nation is now the world's seventh-biggest economy, and it's time it acted that way.

Sources: Bloomberg News