Copper prices have been melting down.

Shanghai-traded copper futures fell over 5% on Wednesday hitting their lowest level since July 2009. Copper prices are down 8.2% in the last three trading sessions on the London Metal Exchange.

Copper prices took a beating on Friday after China's first domestic bond default. Copper prices have also tumbled after Chinese exports plummeted.

But there's more to consider than just that.

Some 60-80% of China's copper imports have been used as loan collateral, tweeted Deirdre Wang Morris at CNBC. Robert Savage at Track Research argues along similar lines:

"Markets are divorcing themselves from the BRIC growth story of the last decade – some will blame the FOMC and the end of QE, others will point to the capacity in those former emerging markets reaching inflation levels – but there is something else. China credit. The link of copper to the shadow banking world isn’t new or a surprise but its changing."

Remember, a credit crunch sends money market rates higher. And at times like this, copper imports rise because companies use copper as collateral and find it easier to obtain copper-backed loans. In June of 2013, for instance as China experienced a credit crunch, we saw refined copper imports rise to a nine-month high.

Savage points to a Goldman Sachs chart from last year that shows that higher rates in China impact the copper import arbitrage.

Goldman Sachs (via Trach Research)

"The appeal of commodity trade-related financing deals in China appears to be waning," wrote Caroline Bain at Capital Economics.

"LME copper prices have moved closer to Chinese prices, so removing the arbitrage opportunity, while the weaker renminbi is threatening to undermine the profitability of the deals."

Bain doesn't think the demand outlook for copper is entirely bleak, though she does expect prices to fall further.

"The Chinese government has pledged a 13% y/y increase in investment in the electricity grid this year," writes Bain. "Furthermore, Chinese import demand has remained strong. Cumulative copper imports in the first two months of the year were still up by 41% y/y.

But some analysts argue that markets have the fundamental demand-supply story wrong and that copper prices could recover as supply remains tight, reports Simon Hall at the WSJ.