Sunday, May 8, 2011

What Michael Pettis Really Said About Copper in China

One commentator, in a widely republished post, alleged that in last week's private newsletter from Michael Pettis that Pettis disclosed a Ponzi Scheme in the import of copper to China, which appears to be used as bonded collateral for financing.  This is a sensationalistic depiction and not an accurate interpretation.

As we quoted Pettis from his private newsletter last week, the imported copper, which is stored in bonded warehouses, is being used as collateral to obtain convoluted and more expensive financing.  As the financing becomes more difficult to rollover, the copper is exported, the financing paid off, and the transaction closed.

As we wrote in "China: Copper In, Copper Out" on April 29th prior to Pettis' private news letter last week, the importing of copper, use as collateral, and then re-exported may eventually have a negative impact on real GDP.  It is creative financing; it is not a Ponzi Scheme in any manner, fashion, or form of the imagination.

The far more important and lengthy part of Pettis' last private newsletter was, as we wrote, about how China is not rebalancing, which he documents with how interest rates are not getting it done, how China's currency has not appreciated as much as thought in real terms when inflation is properly considered, and wage increases are improving and aiding rebalancing, but not enough and for the wrong reasons.

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