Trader pledged metals in Qingdao three times for loans, source says

Decheng Mining, at centre of Qingdao probe into commodities financing, obtained more than 2.7b yuan in loans from deals, source says

PUBLISHED : Friday, 04 July, 2014, 1:41am
UPDATED : Monday, 07 July, 2014, 10:59pm

Decheng Mining pledged the same metals stockpile at the port of Qingdao three times over to obtain more than 2.7 billion yuan (HK$3.37 billion) of loans, a person briefed on the matter said, citing preliminary findings of an official investigation.

The authorities were checking metal inventories worth about 1.54 billion yuan including 194,000 tonnes of alumina, 62,000 tonnes of aluminium and some copper, the person said.

Foreign and domestic banks are examining lending linked to metals at Qingdao amid concern that risks are more widespread on the mainland, where traders use commodities from iron ore to rubber to get funding.

Steps by the central government to rein in credit raised companies' borrowing costs in recent years and triggered a surge in commodities financing deals that Goldman Sachs estimates to be worth as much as US$160 billion.

"The whole Qingdao probe will just keep fermenting, inevitably leading to banks increasing their scrutiny of commodities-backed financing activities," Fu Peng, the chief strategist at Galaxy Futures, said in Beijing.

Bank of China, Export-Import Bank of China, China Minsheng Banking and 15 other mainland banks had lent about 14.8 billion yuan to Chen Jihong, Decheng Mining's owner, and his companies, the person said.

Chen, a Singaporean national born in Shantou, Guangdong, had been detained and the city state's foreign ministry was providing consular assistance to him and his family, the ministry said last month. He was also involved in a separate inquiry in Gansu province, two bankers assisting with the probe said last month.

The collateral ratio for loans to Dezheng Group, Decheng Mining's parent, was 55 per cent on June 13, Minsheng said last month. That means for every 100 yuan of collateral offered by the borrowers, 55 yuan was given in loans.

Local government officials are updating creditors about the probe on a weekly basis, with the latest meeting held on Tuesday, the person said.

Lenders are tightening their commodity financing criteria in the wake of the probe.

Some banks have raised margins for letters of credit for iron ore financing to 30 to 50 per cent from 15 to 30 per cent previously, people familiar with the matter said last month. Others reduced overall credit available for iron ore financing and had set up a cap on credit used in some locations, they said.

Foreign banks are also assessing their exposure to Qingdao. Standard Chartered's commodity-related exposure in the Qingdao area was about US$250 million, chief executive Peter Sands said last month.

"We don't want to blow the case out of proportion because it seems to be an isolated incident involving illegal activities in one port - Qingdao," Fu said. "All of us will certainly keep watching how this unfolds."