After China port fraud probe, messy legal fight chills metal trade

Sun Aug 3, 2014 5:19pm EDT
 
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By Polly Yam and Fayen Wong

HONG KONG/SHANGHAI (Reuters) - As global banks and trading houses fire off lawsuits over their estimated $900 million exposure to a suspected metal financing fraud in China, the tangled legal battle to recoup losses is set to drag on for years and hinder a swift recovery in metal trade.

HSBC (HSBA.L: Quote) is the latest bank to launch legal action since Chinese authorities started a probe into whether the firm at the center of the allegations, Decheng Mining, used fake warehouse receipts to obtain multiple loans.

Several banks had already ditched their commodity trading divisions due to low returns. The scandal, centered on the eastern port of Qingdao, means those remaining in the commodity financing business will have to consider their future, or at least bring in new controls on lending requirements.

It has also acted as a warning over murky business practices in China and highlighted the difficulties of navigating the Chinese legal system for foreign companies, some of which have since frozen new financing business.

"In the next six to twelve months, the impact would likely be reduced appetite for lending on metal collateral," said Daniel Kang, Asia head of basic materials equity research at JP Morgan. "Copper imports may come under pressure in the second half, partly related to smaller traders going bankrupt."

China's imports of refined copper, the most widely used metal in financing, fell 8 percent in June from a year earlier to hit a 13-month low as banks reduced lending for metals imports following the Qingdao probe, which was first reported at the start of that month. Using commodities as collateral to raise finance is common in China and not illegal, but duplicating receipts to repeatedly mortgage the full value of an asset is fraud and could leave more than one creditor holding claims to the same collateral.

MULTIPLE CLAIMANTS   Continued...

 
An employee checks aluminium ingots for export at Qingdao Port, Shandong province, in this March 14, 2010 file photo.  REUTERS/Stringer/Files