| HONG KONG/SHANGHAI
HONG KONG/SHANGHAI Aug 4 As global banks and
trading houses fire off lawsuits over their estimated $900
million exposure to a suspected metal financing fraud in China,
the tangled legal battle to recoup losses is set to drag on for
years and hinder a swift recovery in metal trade.
HSBC is the latest bank to launch legal action
since Chinese authorities started a probe into whether the firm
at the centre of the allegations, Decheng Mining, used fake
warehouse receipts to obtain multiple loans.
Several banks had already ditched their commodity trading
divisions due to low returns. The scandal, centred on the
eastern port of Qingdao, means those remaining in the commodity
financing business will have to consider their future, or at
least bring in new controls on lending requirements.
It has also acted as a warning over murky business practices
in China and highlighted the difficulties of navigating the
Chinese legal system for foreign companies, some of which have
since frozen new financing business.
"In the next six to twelve months, the impact would likely
be reduced appetite for lending on metal collateral," said
Daniel Kang, Asia head of basic materials equity research at JP
Morgan. "Copper imports may come under pressure in the second
half, partly related to smaller traders going bankrupt."
China's imports of refined copper, the most widely used
metal in financing, fell 8 percent in June from a year earlier
to hit a 13-month low as banks reduced lending for metals
imports following the Qingdao probe, which was first reported at
the start of that month.
Using commodities as collateral to raise finance is common
in China and 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.
With multiple claimants, cross-country jurisdictions,
involvement of state-owned entities and a separate corruption
probe into Chen Jihong, the chairman of Decheng's parent firm,
the lawsuits stemming from the alleged fraud are unlikely to be
wrapped up soon.
"The problem is that court judgments attained outside of
China are not recognised on the mainland. Companies cannot
simply take the judgments into China and have Chinese courts
freeze assets," said William McGovern, a lawyer at Kobre & Kim
who specialises in international commercial disputes.
Firms may also try to recoup losses via arbitration, as
China recognises international arbitration awards, but that
process typically takes at least two to three years.
"The other question is, where are the assets?," said
McGovern. "Obtaining an arbitration award against a fraudulent
entity is only valuable if the defendant's assets can be located
and seized to satisfy the judgment."
In the Qingdao case, a problem for some Western banks
trying to retrieve cash is that their contracts were signed with
global warehousing firms acting as collateral managers, leaving
them no direct way of claiming in Chinese courts.
To seek redress, some are teaming up with their collateral
managers, which have local units holding contracts at the port.
"It's a strategic alliance," said a source at a global
warehousing company. "The collateral managers have said to the
banks: Let's join hands to get the real enemy."
Decheng and its parent could not be reached for comment,
while attempts to contact Chen Jihong by his mobile phone were
also unsuccessful. It was not clear if he has appointed lawyer
to represent him.
The full financial impact of the Qingdao case is unclear,
but publicly traded banks and trading firms have been forced to
disclose potential losses.
HSBC, Standard Chartered, Citi, Standard Bank
, Mercuria Energy Trading SA and Citic Resources
Holdings Ltd have more than $880 million of exposure,
according to company statements and reports.
In addition, Chinese media reported on June 18 that Chinese
banks have a total exposure of about 16 billion yuan ($2.58
billion) on loans to Decheng Mining and its related companies.
Qingdao Port, whose listed Hong Kong unit faces a
lawsuit brought by Citic Resources Holdings claiming
damages of $108 million, declined to comment on the state of the
Chen, chairman of Dezheng Resources, the parent company of
Decheng Mining, had been detained by the Communist Party's
anti-corruption body as part of an unrelated corruption probe
linked to the state-controlled Western Mining Group.
He was only recently transferred to police custody in
Qingdao for questioning, said a source who works at one of
A native of China's Guangdong province, Chen has since taken
For Standard Chartered and HSBC, which have filed various
suits either in Hong Kong or Singapore against Chen and his main
overseas financing vehicle, Zhong Jun Resources (S) PTE, a
resolution could take years, lawyers said.
Standard Chartered and HSBC declined to comment.
Others hoping to lay claim on Dezheng's China assets will
have to wait in line behind the Chinese banks, as they may be
given the first claim on assets, lawyers said.
"You can never fully protect against somebody who is all set
out to cheat," McGovern said.
"But you can protect yourself by doing thorough checks on
both the individuals and the business and by using enforceable
agreements, including having credible third-party guarantors who
can assume the liability."
(Additional reporting by Melanie Burton in Sydney; Editing by
Ed Davies and Alex Richardson)