Credit-Mad Chinese Companies


". . .are hoarding copper in a ponzi scheme for new loans?"

Business Insider, Gus Lubin

China still hasn't taken serious steps toward rebalancing and some areas of the economy are getting even more unbalanced, says Peking University's Guanghua School of Management Finance Professor Michael Pettis.

For instance, this ridiculous anecdote about copper-fueled ponzi schemes:

Since January I've been writing about—and trying to figure out—the strange happenings in China's copper market:

China had been importing for many months far more copper than was needed for real use. . .in spite of a huge surge in domestic infrastructure and real estate development, which has boosted copper demand. Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China's value-added tax (VAT).

Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses. Why? One possibility was pure speculation. If you think China's domestic copper use will soar, and with it prices, it might make sense to buy and hoard copper. But there seemed to be more hoarding than normal. . .it turns out, that the copper purchases were not entirely, or even mainly, speculative. They were part of a financing scheme for companies that, despite the avalanche of new lending within and outside normal RMB lending, were having trouble accessing bank credit. . .it seems credit-starved companies were importing copper because they could obtain trade finance or some other sort of foreign financing, and then used the physical. . .as collateral for domestic borrowing. The financing was continually rolled over. Buying copper was just a way to borrow for companies that needed loans and were otherwise unable to get them.

That doesn't mean there isn't liquidity in China. There is tons of it, but much of the credit is being disintermediated because of constraints on bank lending.

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