Randomness (r_ness) wrote,
Randomness
r_ness

After many months and billions borrowed, the Chinese authorities have finally cracked down on the practice of importing copper as collateral for loans to get around the government's attempt to tighten lending.

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.

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.
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."
Tags: money
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