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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are, invited to visit my other blogs if interested.
Ashok
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