Everyone knows that China is the world’s largest consumer of several commodities, including copper, iron ore, and aluminum. Everyone knows the Chinese have been stockpiling tons of these same commodities. They use them to produce value added products to sell in the world market. However, almost nobody knows that international banks have been making huge loans to borrowers that use these warehoused commodities as collateral.
Well, wouldn’t you know it? There may be a nest of rats in those stockpiles.
Chinese authorities and some of the banks that make these commodity collateral-based loans are investigating both borrowers and those warehouses. They want to determine if the borrowers fraudulently obtained multiple loans by pledging as collateral, the same stockpiles of commodities over and over again.
While this is obviously bad news for the loaners, the amounts of commodities involved make this potentially a worldwide crisis. And now we have to find out exactly what these “strikebreaker” are doing not only to the involved banks, but also the Chinese and world economies …
The Pain Spreads
If these fraudsters used borrowed money to buy more commodities to stockpile, or blew the borrowed money on other schemes, and the banks call their loans in, all hell could break loose. (Besides, you can’t mess with big banks like Citigroup, Standard Chartered and BNP Paribas and not expect any ramifications.)
If these banks made multiple loans to fraudsters to buy more commodities, their leveraged nightmare may be about to force the banks to sell their stockpiles, which could depress world prices. Not only would commodity prices tumble, but it shall bring yet another depression world wide.
Copper is one of the commodities stockpiled in storage facilities owned by Qingdao Port International Co., which just went public on the Hong Kong Stock Exchange. The port and warehouses are located in Qingdao, a city of 9 million people in China’s eastern Shandong Province.
“All our businesses are operating normally,” Qingdao Port Chairman Zheng Minghui said last week.
However, also last week, copper prices fell 4% on media reports about banks and authorities investigating Qingdao Port and the collateral fraud. Copper closed last week at $3.0530 per pound after falling 10% in March when Chinese government officials stated their intention to crack down on copper-backed loans.
This is a precautionary note to buyers of some Chinese IPOs, like Qingdao Port International. But it’s more telling of the larger credit problems in China and what their unraveling might do to world markets and China’s near-term growth prospects.
We have been seeing for several months now that China’s credit issues are surfacing with increasing frequency. Even though they have been papered over effectively by Chinese leaders, there’s going to come a time when they will be exposed. This warehouse fraud is another straw in the basket about to break the back of China’s credit bubble.
This can happen because over ambitious money greedy speculators and supporting Banks are hedging and over hedging on same collaterals to drag funds out of Big Banks, presuming that their pledges will never go wrong. But nobody can say that. We Indians should learn from this before it is too late that we should draw policy at the speculators' market that hedging over hedging will not be permitted. If Sebi and RBI takes the matter before it is tool late we may be able to save our money market from getting drawn in the crisis that is expected to blow up soon in the international money market. This dare devilry Indian Banks cannot afford. In addition to that Indian operators should be banned from dealing in such deals from India; this is required to protect them from loses.
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