Traders at risk from bank credit clampdown

A warehouse fraud in Qingdao's port has forced banks and trading houses to consider new controls in the mainland's massive commodity financing business, which traders say could lead to drying up of credit for all but large firms and state-owned companies.

Any new requirements would also increase the risk that customers who do not regain credit lines may default on payments for services such as hedging, or for imports.

"The fear is not so much about the big boys, but some of the other smaller, newer players, who may have only been in this commodity financing game for the last two to three years," said Jeremy Goldwyn, a director with commodities broker Sucden. "If all of a sudden the tap is turned off to them, they might have more of a crisis."

According to sources, Standard Chartered Bank has suspended some commodity financing deals in Qingdao port after authorities there launched a probe into a private trading firm, Decheng Mining, that is suspected of duplicating warehouse certificates to use a metal cargo multiple times to raise financing.

For Western banks such as Standard Chartered, HSBC and BNP Paribas, which are restricted in the domestic loan market, the metals financing business is a lucrative alternative but the Qingdao scandal has renewed focus on counterparty risk.

Goldman Sachs estimates that commodity-backed deals account for as much as US$160 billion, or about 30 per cent of the mainland's short-term foreign-exchange borrowing.

"In the next two months, some smaller companies may default on term copper shipments if they cannot receive letters of credit or if they can't find a bank to do inventory financing," said a trader at a large international trading house.

As they review their commodity lending business, some foreign banks are considering measures such as getting finance guarantees from Chinese banks for letters of credit issued to local firms and taking on insurance with more comprehensive coverage, bank sources said.

In the case of Decheng, there are worries among exposed banks that they would have difficulties recovering the losses because most of the financing agreements were signed with its Singapore-registered unit, which has limited assets to pay back creditors, said the executive.

For smaller end-users and trading firms, local and Western banks are also thinking of imposing loan restrictions that will require shippers to prove that they already have domestic buyers for the metal, sources said.

Shanxi Coal International Energy said yesterday it was suing Decheng Mining and its parent company over more than US$177 million in missed payments.