| HONG KONG/QINGDAO, China/SYDNEY, June 13
HONG KONG/QINGDAO, China/SYDNEY, June 13 The
trail that led investigators to a suspected metal financing scam
at China's Qingdao port which has spooked Western banks and hit
global metals prices began with a Communist Party corruption
probe 1,000 miles away in the old Silk Road city of Xining.
The Central Commission for Discipline Inspection (CCDI) said
in late April that it was investigating the city's Party
secretary, Mao Xiaobing, for suspected "serious discipline
violations" - a term generally used to denote graft.
What was not made public at the time was that the
authorities were also investigating Mao's business associate
Chen Jihong, a veteran aluminium and alumina trader and chairman
of Qingdao-based Dezheng Resources Holding Co. Ltd.
Dezheng's trading unit, Decheng Mining, is now at the centre
of a separate probe into the alleged duplication of warehouse
receipts to obtain multiple loans secured against a single cargo
of metal, according to police sources with direct knowledge of
The use of commodities as collateral to raise finance is
common practice in China and is not illegal. But duplicating
receipts to repeatedly mortgage the full value of an asset is
fraud and could leave more than one creditor holding claims
to the same collateral.
Industrial metals prices have fallen since authorities at
Qingdao, the world's seventh largest port, announced the probe
last week, amid concerns it could prompt Western banks to
tighten controls over commodity financing.
It has also played on Western investors' fears that lifting
the lid on even a seemingly isolated case of fraud may uncover
more landmines lurking within China's opaque "shadow" financial
system, and sent global banks and trading houses scrambling to
check their exposure.
"Like anything, the more you dig, the deeper you get," said
Jeremy Goldwyn, a director in charge of Asia business at
commodity broker Sucden. "They have uncovered something
unwittingly and to some extent it fuels the argument, held by
some, that 'who knows what other problems are out there, it's
all going to end in tears'... I don't think there's any evidence
of that at all."
China's President Xi Jinping has launched a purge against
corrupt officials after warning that endemic graft threatens the
very survival of the Communist Party.
While the CCDI has revealed no details of the investigation
into Xining Party boss Mao beyond a terse one-line statement on
its website, such political probes are typically wide-ranging
and often involve investigators trawling through the affairs of
dozens of the target's business associates and allies.
That's how Chen first came to the attention of the
corruption watchdog, according to six people who have done
business with him.
A native of southern China's Guangdong province who has
since taken Singapore citizenship, Chen has been trading metals
since the 1990s, and is a well-known figure in Qingdao, a major
metals hub on the eastern seaboard, according to industry
His business ties to Mao were through Western Mining Co Ltd
, a Shanghai-listed subsidiary of state-controlled
Western Mining Group. Mao was chairman of the
parent group from 2000-09, and of the listed company from
2004-09, according to its 2007 IPO documentation. Chen was an
executive at Western Mining Co until 2006. One of Chen's
companies, Hubei Hong Jun Investment, was also a shareholder of
Western Mining Co between 2004-06.
Trading company sources and bankers who have previously
dealt with Decheng said Chen has been detained by authorities
since late April, having initially been investigated as part of
the Mao inquiry that was unrelated to Qingdao port.
Western Mining Co did not respond to phone or email requests
Industry sources say Decheng had initially tried to keep
operating as normal, but by May some Chinese banks had learned
of Chen's detention and started cutting credit to the firm and
asking for outstanding payments. By late May, Chinese and
foreign banks and traders scrambling to check their
Decheng-linked metal stocks found that single cargoes appeared
to have been used for multiple financing, said a source at a
bank with knowledge of the investigations in Qingdao.
Calls to Decheng Mining went unanswered, and a staff member
at the firm's Qingdao office, who would only give his surname as
Liu, would not comment on the police investigation or Chen's
whereabouts. Calls to Chen's cellphone went to voicemail.
Singapore-registered Zhong Jun Resources, an associate
company of Decheng, did not respond to a series of calls
requesting comment. Chen is a director of Zhong Jun.
A woman, who said she was Chen's wife, said by phone from
his home number in Singapore that she had not heard from her
husband in many weeks and did not know where he was.
Decheng had imported aluminium and alumina for financing
over the past decade and added copper to imports in recent
years, trading sources said.
When a cargo has arrived at a bonded warehouse in China, the
warehouse company typically issues a receipt as proof of the
stocks. The firm can then use the receipt to obtain short-term
finance from a bank, with the metal as collateral.
This has become a popular method of raising finance in
China, often to skirt higher local borrowing rates and other
credit restrictions, and is not illegal. The short-term funds
raised might be invested in other markets, such as property, or
re-lent via the regular or shadow banking system.
Two police sources said authorities were investigating
whether Decheng had raised multiple loans using duplicate
warehouse receipts backed by the same cargo, which, if proven,
could potentially leave its creditors exposed.
Authorities have not yet disclosed the amount of metal
involved in the financing probe, but sources familiar with the
matter said it was about 20,000 tonnes of copper, nearly 100,000
tonnes of aluminium ingots and about 200,000 tonnes of alumina,
the raw material for aluminium production. That quantity of
metal would be worth about $390 million at current prices.
Spooked by default worries, around a dozen Chinese bank
representatives held a meeting in Qingdao with local government
officials on June 6 to discuss the situation, said an official
at the local Qingdao branch of Industrial and Commercial Bank of
China , who asked not to be named.
"We're not the only one with a big exposure. Quite a few
other banks at the meeting said Decheng has outstanding loans of
over several hundred million yuan with them," said the official,
who did not attend the meeting but said members of his team did.
Two sources said the local banks decided at the meeting that
they would not press charges against Decheng and would not
freeze its assets.
"Decheng has a lot of physical assets, so the thinking for
now is that the assets can be sold and Decheng can pay down some
debt," said an industry source familiar with the situation.
It is unclear how competing claims on Decheng's assets would
be resolved if any fraud were proven.
Foreign banks have said little for now while they try to
assess their potential exposure. New York-based Citigroup Inc
, Standard Bank Group and Standard Chartered
are among the main players financing copper on behalf
of clients at the port.
Standard Chartered has said it is reviewing metals financing
to a small number of firms in China. Citigroup said it would
work closely with relevant authorities, warehousing companies
and clients in the event that its clients were affected. South
Africa-based Standard Bank said it was investigating potential
irregularities at Qingdao, but could not quantify losses, if
"All the stakeholders, including representatives from the
foreign warehouses, banks and trading houses affected, held a
meeting last week to get a handle of the situation," said a
source at one of the Western banks. "We are still assessing our
exposure because we don't know if there have been fake receipts
The ICBC official in Qingdao said Decheng has defaulted on
loan repayments since April and owes the bank more than 100
million yuan ($16 million) for its onshore business unrelated to
metals financing at Qingdao Port. No one at ICBC's head office
could be reached for comment.
Qingdao port has sealed its Dagang bonded metal storage area
and suspended delivery of metals from the section after
companies sought court orders to sequestrate the metal.
($1 = 6.2151 Chinese Yuan Renminbi)
(Additional reporting by Rachel Armstrong in Singapore; Writing
by Alex Richardson; Editing by Ian Geoghegan)