China’s steel traders pledged fictitious inventory as collateral for bank loans17 September, 2012, 14:29. Posted by Zarathustra
While the global effort of monetary easing (well, mainly ECB and Fed really) will help the Chinese economy to stabilise a bit, and hopefully to pick up slightly in the short-term, we shall never lose sight of the risks that are not removed by easing outside.
On top of the need to adjust the economy, which still exists regardless of monetary easing outside of the country, the debt problem has also not gone away. For instance, we briefly talked about how the non-ferrous metals industry in China seems to be relying too much on short-term debts, which may create liquidity problems for some of these companies if they are unable to roll-over their debts.
Steel industry is certainly another focal point as far as credit risks are concerned. This is, of course, not all that surprising when you see steel prices falling as the economy slows, and Baosteel’s Chairman now expects the whole steel industry could be making loss in September according to DFdaily.
Recently we have heard and read quite a lot of disputes between banks and steel companies in China (which we, regrettably, have not spent much time mentioning them here).
As another sign of difficulties, some steel companies appear to be rolling over old debts into new debts already.
Reuters today runs a story about steel companies borrowing from banks, pledging their steel inventories as collateral for loans. This is all fine, except that the inventories being pledged do not exist as banks try to seize the collateral from troubled steel companies:
As defaults have risen in the world’s largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.