Tweet
http://www.chicagotribune.com/busine...1.story?page=2
There is no reliable data on the extent of such trade financing -- inventories of commodities can be anything from poorly catalogued to a state secret -- but what is sure is that it is widespread enough that it has expanded beyond copper into the markets for steel and soybeans.
With steel prices still in the doldrums and a significant portion of the country's 610 million tonnes of "rebar" inventories used as collateral, it is now the weakest link in this elaborate scheme.
For steel, which is largely domestically traded, merchants tend to either use their warehouse stocks as collateral for loans, or to turn to acceptance bills, an equivalent to a letter of credit for domestic markets.
"The proceeds obtained from financing by steel traders are usually used in other sectors such as property and underground loans," said a trader with a Shanghai-based steel firm, the owner of which is from Wenzhou, which has become a hub of informal financing that has started to see defaults.
Some of the smaller players have already started to be weeded out.
"There have been more than 15 steel trading firms, with most of the owners from Fujian province, being forced to shut down as their financing chain was broken this year," said a trader based in Wuxi, Jiangsu province who was in direct contact with one of the firms that closed.
"Around three steel trading firms have been sued by banks now, as they used the proceeds from financing for extending private loans, but now can't get those loans repaid," the trader said.
SHADY SOYBEAN TRADERS
The practice extends to agricultural commodities.
Faced with tepid domestic demand, some soybean crushers in Shandong province have also used LCs to import beans, then sold the beans into the market, even at a loss, to get cash that they can channel back into the underground banking system.
A lot of that money poured into Wenzhou, a city in eastern Zhejiang province known for savvy entrepreneurs that has now become the center of concerns over systemic defaults in such informal lending networks.
Lin Shunfeng, a futures manager at Shenyin & Wanguo Securities who travelled to Jiangsu, Anhui, Hubei and several other provinces to research the topic, said the practice was most prevalent around June, when the market was oversupplied and port stocks were filled to the brim.
He estimated that around 10-15 percent of the 6 million tonnes of soybean stocks held at ports in June were used as a tools for cheap yuan.
Based on soybean prices at that time, those stocks would imply at least 1.23 billion yuan was rolled on to underground loans, but the actual value could have easily been in the tens of billions as firms could use the cash received as a leverage for larger sums.
It is difficult to estimate the scale of such funds involved in the steel and copper markets, but the figures are clearly much bigger, as traders well connected with warehouses often are able to use the same batch of cargo to repeatedly get bank loans. Some could even inflate the value of their stocks to land fatter loans.
With steel prices still in the doldrums and a significant portion of the country's 610 million tonnes of "rebar" inventories used as collateral, it is now the weakest link in this elaborate scheme.
For steel, which is largely domestically traded, merchants tend to either use their warehouse stocks as collateral for loans, or to turn to acceptance bills, an equivalent to a letter of credit for domestic markets.
"The proceeds obtained from financing by steel traders are usually used in other sectors such as property and underground loans," said a trader with a Shanghai-based steel firm, the owner of which is from Wenzhou, which has become a hub of informal financing that has started to see defaults.
Some of the smaller players have already started to be weeded out.
"There have been more than 15 steel trading firms, with most of the owners from Fujian province, being forced to shut down as their financing chain was broken this year," said a trader based in Wuxi, Jiangsu province who was in direct contact with one of the firms that closed.
"Around three steel trading firms have been sued by banks now, as they used the proceeds from financing for extending private loans, but now can't get those loans repaid," the trader said.
SHADY SOYBEAN TRADERS
The practice extends to agricultural commodities.
Faced with tepid domestic demand, some soybean crushers in Shandong province have also used LCs to import beans, then sold the beans into the market, even at a loss, to get cash that they can channel back into the underground banking system.
A lot of that money poured into Wenzhou, a city in eastern Zhejiang province known for savvy entrepreneurs that has now become the center of concerns over systemic defaults in such informal lending networks.
Lin Shunfeng, a futures manager at Shenyin & Wanguo Securities who travelled to Jiangsu, Anhui, Hubei and several other provinces to research the topic, said the practice was most prevalent around June, when the market was oversupplied and port stocks were filled to the brim.
He estimated that around 10-15 percent of the 6 million tonnes of soybean stocks held at ports in June were used as a tools for cheap yuan.
Based on soybean prices at that time, those stocks would imply at least 1.23 billion yuan was rolled on to underground loans, but the actual value could have easily been in the tens of billions as firms could use the cash received as a leverage for larger sums.
It is difficult to estimate the scale of such funds involved in the steel and copper markets, but the figures are clearly much bigger, as traders well connected with warehouses often are able to use the same batch of cargo to repeatedly get bank loans. Some could even inflate the value of their stocks to land fatter loans.
Comment