| BEIJING, July 3
BEIJING, July 3 Chinese petrochemical imports
have become the latest commodity financing tool to come under
investigation for possible fraud, highlighting the risks from
the widespread use of raw materials as collateral to raise loans
and skirt credit restrictions.
Commodity financing deals in China, which Goldman Sachs has
estimated to be worth as much as $160 billion, have come under
close scrutiny after an alleged metal financing fraud at Qingdao
Port, a huge trading hub in eastern China.
Now police in northern China are investigating another
suspected fraud at Tianjin Port near Beijing, police and trade
sources said, involving "mixed aromatics", a refinery product
commonly used for blending petrol.
The use of commodities, from traditional copper sheets to
perishables such as soybeans and rubber, to raise finance has
been increasingly popular in recent years as Chinese
policymakers have sought to tamp down rapid credit growth.
That has added to the build-up of credit in the so-called
shadow banking system - trillions of dollars in non-bank lending
that is seen by analysts as one of the key risks to China's
economy - and also increased the potential for fraud.
In Qingdao, China's third-largest port, police are
investigating whether a private metals trader, Decheng Mining,
had duplicated warehouse receipts so that a cargo of metal could
be used multiple times to obtain financing.
The concerns raised by that investigation have forced banks
and trading houses to consider new controls in the country's
massive commodity financing business, which traders say could
lead to the drying up of credit for all but large firms and
The Tianjin case appears much smaller, but illustrates the
breadth of the use of industrial materials in financing.
A local unit of state-run PetroChina's trading arm
Chinaoil, paid more than 40 million yuan ($6.45 million) for
about 4,000 tonnes of mixed aromatics stored at a tank in the
city, according to a Chinaoil source and another trader who
frequently does business with the firm.
But when Chinaoil, which is not suspected of any wrongdoing,
went to take delivery of the cargo around mid-May it found it
had been impounded by the authorities.
The case, involving a private Chinese fuel company and a
trader suspected of contract fraud, is now under police
investigation, according to two police sources and traders.
"Chinaoil went to the police after realizing that the 4,000
tonnes bought could not be delivered," said the Chinaoil source,
who has direct knowledge of the case. Chinaoil officials and a
PetroChina spokesman did not respond to calls or text messages
Details of the alleged fraud remain unclear, but the two
trading sources said it involved at least one 30,000 tonne cargo
worth around 300 million yuan ($48.3 million) stored at a tank
in Tianjin. Chinaoil's purchase was part of that cargo, they
The sources said the certificate of ownership Chinaoil
received on payment may have been duplicated. The investigation
was looking at whether the same lot was sold to multiple buyers,
and whether it was used to raise loans, they said.
Chinaoil has since banned its regional offices from trading
mixed aromatics, allowing only traders at its Beijing
headquarters to deal with the fuel, said the Chinaoil source.
At least two other, private companies were also potential
victims of the suspected fraud, the sources said.
Mixed aromatics, also known as reformates, have become
increasingly popular as a financing tool in recent years, as
China has tightened credit and companies look to profit from
interest rate differentials.
Typically, importers buy a cargo using a letter of credit
obtained from a bank at a low rate of interest.
They then sell it on the domestic market, often at
below-market rates, for quick cash to be reinvested in
high-return areas such as real estate or shadow banking, where
the gap between returns and funding costs could be as much as 10
"It's a play on interest rates arbitrage ... so long as the
profits made in loans or currencies can cover losses in selling
the oil in the physical market," said an oil trader.
Reformates - also used as a feedstock, or raw material, to
produce petrochemicals - are popular because of their high value
per shipment and the ease with which they can be traded.
"The product needs to have enough liquidity so it can be
sold in the market quickly," said the trader.
Unlike the controlled crude oil market, companies do not
need import licences to bring mixed aromatics shipments into
China, while trading of other petroleum products, such as diesel
and kerosene, is dominated by only a handful of state companies.
Imports of mixed aromatics soared after the 2008/2009
financial crisis to peak at 3.6 million tonnes in 2011, as
dealers cashed in on tax incentives. China did not levy
consumption tax on the product until early 2014.
Imports have fallen since as the consumption levy wipes out
the earlier profit margins, but the lure as a financing tool has
helped hold levels up at close to 3 million tonnes a year for
2014, traders estimated.
Several main players - little known private firms - were
believed to be holding around 400,000 tonnes of stocks, said a
second Beijing-based trader.
"Any commodity that sits in storage for long, you could
reasonably suspect it as being used for financing," said a
second senior trader. "Mixed aromatics is one of those."
Fuel oil, of which China is Asia's top importer, is harder
to use for financing as it incurs higher storage fees, traders
($1 = 6.2119 Chinese Yuan Renminbi)
(Additional reporting by Florence Tan in Singapore; Editing by