Recent events in Qingdao Port highlight risks in commodity trading/financing in China

By Wai Yue Loh

In early June this year, a Chinese metal trading company and its affiliates were reported to have been using the same stockpiles of metal commodities stored at Dagang, Qingdao Port, China, for the purpose of collateralising multiple loans. This was discovered amid an apparently unrelated investigation by the government into the activities of a government official in Qinghai Province, and a trail led the investigators to this Chinese metal trading company, whose boss was a close ally of this government official. The allegations are still being investigated and the severity of its impact remains uncertain at this stage; it is however believed that the losses/exposure that may be caused to the banks and commodity traders involved could potentially amount to billions of US dollars.

We have recently received a number of enquiries from clients and are also acting for various sectors of the industry affected by the incident. This article seeks to provide a brief note of our understanding of the matter and the issues involved and to provide some preliminary comments from a risk management perspective.

The incident centres around a Chinese company, Decheng Mining (a Qingdao-based metals trading company), and its parent company, Dezheng Resources Holdings Co, which are reported in the Chinese press and elsewhere to have procured multiple warehouse receipts in respect of each parcel of commodity and to have on-sold such cargo on a landed basis to other commodity traders/banks and/or pledged these multiple warehouse receipts to obtain multiple financing from a number of international and Chinese banks against the same collateral…

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