China metal financing deals reignite transparency issue
Nearly two years I wrote up a Citigroup metals report concerning China. It included the following sentence quoting that report: “However, more metal may soon come on the market as banks clamp down on ‘multiple collateral raising’— that is, the widespread practice in China of producers using the same metal as collateral for several loans”.
That wasn’t even news to me. I had already written about this dodge before the Citi report surfaced. If I knew that there were suspicions that this “multiple collateral raising” was going on, so should the banks that were actually lending the cash.
So why the surprise this week? On Wednesday London’s The Financial Times headlined “Copper retreats on China financing fears”. The news was that shipments of copper and aluminium through the port of Qingdao had been halted after a trading company in the city was alleged to have used the same stocks of copper as collateral for multiple deals. The paper quote Macquarie Bank estimates that the company in question holds 20,000 tonnes of copper but had collateralised up to 50,000 tonnes. As much as 100,000 tonnes of aluminium may also be involved.
Let’s go back to that 2012 report and note the words “the widespread practice” of doing such deals. It was well known back then.
So it should have been of little shock effect when Reuters this week broke the news that Qingdao Port authorities were counting the industrial metals held in its bonded warehouses to determine if they matched the amount cited in documents pledged to banks as collateral for loans. It was reported that Standard Bank Group had begun investigations into what news reports called “potential irregularities”. The Johannesburg-based bank no doubt has done some business in these collateral loans. Meanwhile, the London-based Standard Chartered Bank is apparently reviewing its China financing business. The head of Macquarie Bank’s commodity research, Colin Hamilton, said the Qingdao probe would make China’s banks “extremely cautious” about financing such transactions (although this would not affect financing shipments to end-users).
But how about this line in The Financial Times this week explaining how the system works. “For banks, the loan is usually considered safe because the metal acts as collateral. But when the metal is pledged multiple times it makes the loan much riskier”. You think?
Get our daily investorintel update
But there is also a wider issue here: one of general transparency. And that has implications for all the sectors covered here on Investor Intel. (And also underlines why our China correspondent, Hongpo Shen, is so valuable in reporting developments that are not easily discovered by outside observers.)
I have long viewed it as extraordinary that the world’s financial system relies so heavily on an economy (China) that is not open and transparent. Economic and business decisions are made not always with complete information.
For example, last year a senior official of the People’s Bank of China gave an interview in which he said the central bank had not added any of the yellow metal to its reserves since its April 2009 announcement that those reserves had increased to 1,054 tonnes. Yet it was reported just last week that Jeff Nichols of American Precious Metals Advisors said his sources told him the PBOC bought 654 tonnes of gold from 2009 to 2011, 388 tonnes in 2012, and more than 622 tonnes in 2013. If that is true, the bank’s holdings would have more than doubled since the 2009 announcement.
At the moment, we have investors fleeing the gold market, the metal sitting at $1,252/oz. Now, if Nichols is right and the PBOC holds 2,718 tonnes (probably more), then confirmation of that would send a shock wave through the gold sector. So you see what I mean? Here are investors making decisions about gold without being able to find out what the most active participant is doing.
We get glimpses of what is happening in the rare earths sector, can take some educated guessers on trends with technology metals such as antimony and tin, and hear from international agencies how many graphene patents have been filed by Chinese companies.
But is far from a full and open picture. And multiple collateralising is just a symptom.
InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.