Via the FT, Michael Liang gives more details about the Chinese copper scam from my earlier post:
He [the trader] said that on March, clothes makers, food manufacturers, and others who have never bought copper before were massively buying copper from the tariff-protected warehouses, in Guangdong for example.The FT adds: "Either way though, you’ve got an impressive example of banks and corporates teaming together to bypass the government’s clampdown on leverage. Indeed, we’re getting a very distinct ‘whac-a-mole‘ feeling here; as soon as Chinese regulators clamp down on one form off informal lending, another one springs up."
These enterprises purchased copper just to get L/C [me: letter of credit] financing, in which banks finance the purchase of the imports for 90 days.
The reason that banks love to do this business – and markets have become so competitive and rates so low – is that 1) the transaction is off the balance sheet, and 2) bank clerks get paid a direct commission on the L/C.