Recently it emerged that duplicate storage certificates used by a minerals trader at the port of Qingdao have made Chinese banks reluctant to provide letters of credit (L/Cs) for commodities traders (DC World News, 2 July 2014).

Details of the apparent fraud are now emerging and it seems likely that genuine traders, particularly smaller ones, may find L/Cs harder to obtain in the wake of this matter.

Metal stockpile

Decheng Mining pledged the same metal stockpile against three duplicate sets of storage certificates at the port of Qingdao.

By doing so, the company reportedly raised more than US$435 million of loans.

Investigations

Foreign and domestic banks are investigating the matter amidst concerns that such risks are commonplace on the Chinese mainland, where traders use commodities of several kinds to raise funds at lower rates than those available for conventional bank borrowing.

Bank of China, Export-Import Bank of China, China Minsheng Banking and 15 other mainland Chinese banks have reportedly lent around US$240 million to Decheng Mining's owner, Chen Jihong and his companies. Foreign banks are assessing their exposure.

L/C shortage

As banks tighten up on L/C provision, one international trader has said that the next two months may feature smaller companies defaulting on term copper shipments because they are unable to obtain L/Cs or inventory financing.

Some foreign banks are reportedly considering measures to secure payments against commodity purchases, including obtaining guarantees from Chinese banks for L/Cs issued to local firms.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.