Thursday, March 31, 2011

"Why the Chinese copper financing scheme is a big deal"

We've been tagging along on this story not so much because we have any special insight but rather because of the size of the potential repercussions. Here's more from FT Alphaville:

FT Alphaville has recently focused on the rise in commodity-backed financing schemes in China as a response to the People’s Bank of China’s tightening measures, which shut credit off to many small- and medium-sized companies in the country, as well as real-estate developers.
But, we would say, this is only one side of the story.
The whole thing does potentially run much deeper.
Sean Corrigan of Diapason Commodities was the first to alert, back in January 2010, that there was a strange correlation between Chinese metal imports and cheap credit availability.

He suspected some of these imports could have been connected to schemes designed specifically to game cheap money from the system — either by circumventing capital controls to bet on yuan appreciation or alternatively to bet on commodity prices outright.

As he warned at the time:
… note that the relative prices of copper, aluminium, and zinc in Shanghai vis-à-vis that on the LME bear more than a passing resemblance to the volume of new loans concurrently granted by Chinese banks (including a rough estimate of ~CNY1 bln for January, as widely bruited on the newswires).
Now, if a high proportion of the commodities imported into China over that period had more to do with speculation than real demand — this does have important implications on recovery economics. Especially since so many respected analysts took Chinese commodity imports at face value, no questions asked....MUCH MORE
We linked on Tuesday with "Umm, Folks: 'Chinese ‘copper financing’ got even more popular this month"' and three weeks earlier in "UPDATED: Uh oh: What's the Real Demand for Copper (a cupric currency conundrum)" I got to put on my raconteur hat with a mention of Chinese hoarding:
If Chinese traders are using copper as a de facto currency it would mean that final demand is nowhere near what conventional wisdom would have it be. As Grandmother used to say, "When the initial condition for your macro model is 'the sky is falling' the appropriate course of action is to short sky. Do you like the potatoes?"

The Chinese are not shy when it comes to hoarding or the fungibility of  commodities vs. currency, see:

Commodities: "Is China preparing for a vampire attack?"

Copper Stockpiled by Chinese Pig Farmers May Be Liquidated   
The latter story was enough for the Russian representative of a major Swiss trading firm to begin dumping a large physical inventory of copper cathodes. 

For weeks he was muttering about "bleeping %$#*!@# Chinese pig farmers"