Advertisements

Missing Collateral a Sign of Weakness in China’s Financing Chains

Missing Collateral a Sign of Weakness in China’s Financing Chains

By JOHN FOLEY

JUNE 12, 2014 12:21 PM 1 Comments

Faith in metal-backed lending in China is corroding – and so is confidence in the country’s giant credit system. Authorities and banks, including Standard Chartered and Citic, are investigating whether traders at Qingdao port used the same lot of copper and aluminum to back multiple loans. Vanishing collateral isn’t a new problem, but could prove to be China’s weakest link.

Lending backed by warehouse receipts is common and helpful, and not just in China. Often, a bank will buy metal in the form of a document showing ownership, with a pledge to sell it back after six months. In hard-asset fixated China, this has morphed from a way of facilitating trade to a method of obtaining speculative finance. Fraud can result when records are out of date or papers fake, as seems to have happened in Qingdao.

The direct damage looks manageable. Copper tied up in questionable trades in Qingdao may amount to 20,000 tonnes – that’s about $140 million at spot market prices. Traders are moving their shipments to other ports that are considered to be better regulated. Some banks may have to write off debts, or mark them up as riskier. But assuming these lenders still want China to treat them favorably, they are unlikely to protest too much about poor controls, or sharply pull back credit.

Imaginary collateral, though, is a deeper problem. Steel traders also backed multiple loans with the same piles of metal in 2012. In a different riff on the same theme, the timber company Sino-Forest came under attack in 2011 from short-sellers for fabricating the trees that made up its main asset. Foreign banks can find themselves exposed because cargo owners use collateral to obtain cheaper overseas loans, and invest at higher returns in China. The problems in Qingdao suggest the banks have failed to learn their lesson.

China can just about manage without foreign lenders, but it can’t do without collateral and confidence. These underpin the explosion in nonbank lending, including trusts and investment products sold to individuals, which has now reached around two-thirds of gross domestic product, according to estimates from Barclays. Copper and aluminum are transparently priced and easily traded, the same isn’t true of coal mines, houses or shopping centers. If supposedly sophisticated banks can get caught out, the rest should be nervous.

 

Advertisements

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: