Using Copper for Credit in China

[Dave Backus @ NYU]

An interesting piece from my colleague Joe Foudy. The author is
Michael Pettis, a long-time emerging markets expert now living in
China. Links below.

I don't guarantee I have this right, but I think Pettis suggests the
following. China's financial markets are far less developed than
ours, or even India's, a product of their unique development path.
Bank loans -- as opposed to capital markets -- are the dominant
mechanism for allocating funds to borrowers, and there's a long
tradition of funneling money to firms and uses that the government
deems desirable. That's led, near as we can tell, to bad loans on a
massive scale and similarly massive bailouts of banks, mostly hidden
from view by the government's ownership of many of the banks. It's a
huge issue going forward, because the most productive businesses don't
necessarily have access to the funds they need to expand, something
you'd think would be good for the economy.

But where there's regulation people often fund a way around it.
Apparently one way to get a loan is to import something. So companies
import copper, sell for cash, and end up with a loan. Meanwhile, much
of the copper is apparently resold abroad, effectively canceling the
original import. It's a little complicated, but if you need a loan
you do what you need to do.

Article: http://www.businessinsider.com/michael-pettis-copper-china-2011-5
Pettis's blog: http://mpettis.com/