China Is Cracking Down On Shadow Banking, But One European Country Is Encouraging It
The scheme was actually pretty simple, and was aimed at maximizing the potential profits on borrowed money as even though copper importers in China received letters of credit valid for 3-6 months, the purchased copper was immediately sold on the domestic market, meaning the importer basically had a ‘free’ line of credit as it could invest the proceeds from the copper sales before having to repay the money drawn down from the letter of credit.
China has been trying to reduce the size of the shadow banking sector, and we argued this was one of the main reasons for the copper price weakness. As the world economy is correlated with how China is doing, the world is obviously keeping a close eye on the Chinese policies, and several first world countries blamed the Chinese regulators for letting things escalate.
But the truth is, the shadow banking issue is much more wide-spread than just China. Sure, the Chinese situation escalated pretty quickly, so it attracted more (unwanted) attention, but let’s have a look at how the shadow banking system is working elsewhere in the world. There is very little doubt peer to peer lending, which is essentially the basis of any shadow banking system, is booming and crowdfunding websites and simple P2P websites are popping up everywhere.
Source: ECB
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