Chinese Trader Said to Pledge Metal 3 Times for Loans

Decheng Mining pledged the same metals stockpile three times over to obtain more than 2.7 billion yuan ($435 million) of loans in China’s Qingdao port, a person briefed on the matter said, citing preliminary findings of an official investigation.

Local authorities are checking metal inventories worth about 1.54 billion yuan including 194,000 tons of alumina, 62,000 tons of aluminum and some copper, the person said, asking not to be identified as he isn’t authorized to speak publicly. Two calls to Decheng Mining, a metals trading house based in Qingdao, went unanswered.

Foreign and local banks are examining lending linked to metals at Qingdao amid concern that risks are more widespread in China, where traders use commodities from iron ore to rubber to get funding. Steps by the Chinese government to rein in credit raised companies’ borrowing costs in recent years and triggered a surge in commodities financing deals that Goldman Sachs Group Inc. estimates to be worth as much as $160 billion.

“The whole Qingdao probe will just keep fermenting, inevitably leading to banks increasing their scrutiny of commodities-backed financing activities,” Fu Peng, chief strategist at Galaxy Futures Co., said by phone from Beijing.

Bank of China Ltd., Export-Import Bank of China, China Minsheng Banking Corp. and 15 other Chinese banks have lent a total of about 14.8 billion yuan to Chen Jihong, Decheng Mining’s owner, and his companies, the person said.

Updating Creditors

Chen, a Singaporean national, has been detained and the city-state’s foreign ministry is providing consular assistance to him and his family, the ministry said June 11. He is also involved in a separate inquiry in northwestern Gansu province, two bankers assisting with the probe told Bloomberg last month.

The collateral ratio for loans to Dezheng Group, Decheng Mining’s parent, was 55 percent as of June 13, Minsheng Bank said in a text message in response to questions last month. That means for every 100 yuan of collateral offered by the borrowers, 55 yuan was given in loans.

Press officers at Bank of China and Minsheng Bank based in Beijing declined to comment, while spokesmen for Export-Import Bank weren’t immediately available.

Local government officials are updating creditors about the probe on a weekly basis, with the latest meeting held on July 1, the person said.

Lenders are tightening their commodity financing criteria in the wake of the probe. Some Chinese banks have raised margins for letters of credit for iron-ore financing to 30-to-50 percent from 15-to-30 percent previously, people familiar with the matter said June 10. Others reduced overall credit available for iron-ore financing and have set up a cap on credit used in some locations, the people said.

Keeping Watch

Foreign banks are also assessing their exposure to Qingdao. Standard Bank Group Ltd., based in Johannesburg, said last month it started an investigation into “potential irregularities” with stores of metals in bonded warehouses at the port. Standard Chartered Plc’s total commodity-related exposure in the Qingdao area is around $250 million, Chief Executive Officer Peter Sands said on June 26.

“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,” Galaxy’s Fu said. “All of us will certainly keep watching how this unfolds.”

— With assistance by Alfred Cang

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