Bankers Focus on Trading Firm in Search for Metals Used as Collateral; Western Bank Executives Say They Made Loans to Entities Linked to Qingdao-Based Decheng Mining

Bankers Focus on Trading Firm in Search for Metals Used as Collateral

Western Bank Executives Say They Made Loans to Entities Linked to Qingdao-Based Decheng Mining

ENDA CURRAN

June 10, 2014 12:26 p.m. ET

Bankers in China are focusing on the actions of a commodities-trading firm as they scramble to find metals they believed were backing loans but which appear to have been used as collateral multiple times.

The operator of Qingdao port, on China’s eastern coast, said this week Chinese authorities were investigating an alleged fraud involving metals stored at the portand used as collateral to obtain multiple bank loans.

Several executives at Western banks said they made loans to entities linked to Qingdao-based Decheng Mining. They are now trying to determine whether these entities issued more than one receipt for the same collateral, using it to back multiple loans, the executives said.

They are also trying to contact Chen Jihong, Chairman of Decheng Mining parent, Dezheng Resources Holding Co. Ltd. These bankers say Mr. Chen has been detained by Chinese authorities and is now unreachable.

Attempts to reach Mr. Chen weren’t successful. Police in Qingdao couldn’t be reached for comment. Efforts to reach both companies for comment were unsuccessful.

The probe has hurt global prices of some commodities on concerns China may crack down further on the use of metals to back loans, which could lead to the dumping of metals onto markets as these trades unwind.

The practice of using commodities to back loans is legal in China, and has been used to get billions of dollars of capital into the country, helping fuel economic growth. But Chinese authorities in April raised concerns the practice could pose a systemic risk to the financial system.

Bankers investigating the matter say they have been unable to get access to Qingdao’s port to assess the collateral. “Until they open up for us to go and look at it we don’t know the extent of the damage,” one executive said.

On Tuesday, inspectors for a Western bank also were unable to survey collateral stored at Penglai port, located about 150 miles south of Qingdao, people familiar with the matter said.

Mr. Chen, a national of Singapore, the Southeast Asian city state, is also a director of Hong Kong-based Zhong Jun Resources Company Ltd., which has offices in Singapore.

A secretary at Zhong Jun said she hadn’t seen Mr. Chen for weeks. A spokesman for Singapore’s Ministry of Foreign Affairs said it was “rendering consular assistance to Mr. Chen and his family.”

The spokesman gave no further details about Mr. Chen or whether he has been detained in China.

Banks, worried about collecting on their loans, have already scaled back lending for metal purchases, potentially cutting Chinese imports, which drive most global commodities markets.

According to accounts by executives at Western banks involved in the probe, lenders provided finance backed by metals such as copper and aluminum stored at Qingdao, one of China’s biggest ports.

These banks would issue the cash upon receiving a receipt from the warehouse showing proof of collateral. But they now are concerned the collateral has been pledged to other lenders.

The bonded zone of Qingdao’s port, one of China’s largest, sits to the city’s north. The zone is banded by six-lane highways, throbbing with the dust and noise of 12-wheel trucks. The largest warehouses are as large as two soccer pitches. A reporter wasn’t allowed to enter.

Decheng’s office is located on the southeastern side of the city in a three-story mall. A guard at Decheng’s gate said the company’s staff had left but operations at the company appeared normal.

Earlier Tuesday, in an announcement to the Hong Kong Stock Exchange, state-owned Citic Resources Holdings Ltd. said it had applied to courts in Qingdao to secure metal assets it owns in warehouses. It said it owns aluminum and copper stored in bonded warehouses at the port.

A number of Western and Chinese banks have sought similar court orders in an effort to secure their collateral, according to one person familiar with the matter. But the court orders won’t alleviate the problem of multiple lenders claiming the same piece of collateral that had been promised to them by the borrower, this person said.