China's Ponzi Finance At Work: Triple Pledging Aluminum Ingots At Qingdao Port

By Wuhong Yuran at Caixin Online


(Beijing) – Qingdao-based Dezheng Resources Holding Co. Ltd. and its subsidiaries have borrowed about 14.8 billion yuan from 18 domestic banks, according to a bank loan list provided to police by an uncle of Chen Jihong, the company's owner.

Banks began to worry about their loans to Dezheng resources when Chen was detained late April for an investigation related to Western Mining Group, a mining major in the northwestern province of Qinghai.

Dezheng Resources, a trading company, was established on September 23, 2004, with registered capital of 370 million yuan. It has subsidiaries in many provinces and regions around the country.

It is common for Chinese companies to use their commodities as collateral to get loans from banks. Dezheng Resources provided warehouse receipts of its commodities at Qingdao port facilities to get bank loans.

Banks urged police to investigate whether Dezheng Resources used duplicate receipts to get loans from different banks, sources close to the company say. It was not clear what police are involved.

The stockpiles of aluminum ingots in Qingdao total about 100,000 tons, but banks have warehouse receipts for 300,000 tons, said a source from a large bank. Besides the receipts held by 18 domestic banks, trading companies and foreign banks also have receipts. The three-month aluminum future is priced at about 11,500 yuan per ton, according to the London Metal Exchange.

Bank of China and China Minsheng Bank led the establishment of a creditor commission to handle the case. "Many banks want to seize the goods and there are few solutions," said the source from a large bank.

A source from the Qingdao banking regulator said Qingdao Port Group Co., the third-party supervisory company that manages the port, has not released information about the case.

Qingdao Port is cooperating with police on the case, said a source close to the company's board on June 19, and only a small portion of goods had problems. The company would provide information as soon as the investigation results come out, the source said.

Eye of the Storm

On June 6, when Qingdao Port listed in Hong Kong, it published an announcement saying it received a police notice on May 31 to assist in checking the stockpiles of aluminum and copper in Qingdao because police were investigating a fraud case involving the metals' owner and a third-party shipment company. On June 3, Qingdao Port received a notice from a local court to seal the commodities involved in the case, under the application from the owner.

Sources from banks said the owner is Decheng Mining, a subsidiary of Dezheng Resources, and the third-party shipment company is Qingdao Hengtong Import and Export Co., which was established in 2006 with major businesses in aluminum and copper sales.

Qingdao Port has stopped work at Dezheng Resources' warehouses so it can check the metal stockpiles, said sources close to the port company. It was mainly checking the stockpiles of aluminum and copper Dezheng Resources used as collateral.

Qingdao Port made no further statement on the investigation.

Foreign banks have sued Qingdao Port for issuing fake receipts in a local court. Domestic banks also asked the court to freeze the assets of Dezheng Resources and have tried to get authentic receipts to secure safety of their assets, bank sources said.

Standard Bank Group Ltd. of South Africa said on June 5 that it launched an investigation regarding illegal operations at warehouses in Qingdao. It was not sure what losses were suffered, it said.

On June 18, CITIC Resources Holdings Ltd. said it had about 123,400 tons of alumina in Qingdao, but the local court did not freeze the stockpiles in the warehouses.

Shanghai-based Wanxiang Group also claims ownership of the metals at the port. The company contacted Qingdao Port to make sure its receipts were real, said a source close to Wanxiang. Because the warehouses were sealed, Wanxiang could not get the metals and finish the transactions.

"It's common for Chinese enterprises to repeatedly use warehouse receipts of bulk commodities to get loans, which could even influence the price of commodities, such as copper around the world," said an employee of a large bank.

"This case is not rare, but it involves a large amount of money this time," said Zhou Zhongming, the former head of Shandong banking regulator. Banks had to rethink allowing a third-party company to supervise their collateral, he said.

When banks carried out trade financing businesses, they had to check the goods and the authenticity of warehouse receipts and stick to registration procedures, said another source from the international office of a large bank.

The Way Forward

Several factors will influence how many of the loans will sour, said sources from banks. It depends on the quality of the assets and local government's efforts to handle the case, as well as whether Qingdao Port is held accountable. Some banks have sued the company for breach of contract in a local court.

Representatives of banks gathered at Decheng Mining on June 13 to talk about plans for handling the debts, but they did not make substantial progress, said a source from a bank with loans to Dezheng Resources.

On June 17, the Qingdao government gathered representatives from banks, regulators and Dezheng Resources to discuss the case. The same day, the banking regulator in the coastal city required banks to check if there were other loans relating to Dezheng Resources.

Banks reported their figures on June 18. Sources from banks said the total amount was lower than 14.8 billion yuan.

Dezheng Resources and its subsidiaries have a total of 10 billion yuan in loans from banks in Qingdao, said a source from a large bank, but banks were still checking the loans related to the company and its subsidiaries around the nation.

Dezheng Resources is a large private company with good performance and does business with state-owned companies, which helps it get loans from banks. "We do all businesses of Dezheng companies," said one employee of the finance department of a large bank's Qingdao branch.

The situation is becoming more complex because banks granted loans to Dezheng Resources and its subsidiaries not only on collateral, but also on guarantees provided by them for each other, Qingdao Port sources said.

Decheng Mining has been an important client of many banks. As of June, it had a total of 7.175 billion yuan in loans from 18 banks in Qingdao, including 2.556 billion yuan from letters of credit and 300 million yuan in guarantees.

Data from the local industry and commerce administration showed that Decheng Mining, set up in October 2005 with registered capital of 850 million yuan, had revenue of 11.6 billion yuan in 2013 and net profit of 356 million yuan. Its total assets hit 6.674 billion yuan in 2013, and its net asset were 2.749 billion yuan.

Erdos Cashmere Group, affiliated with Erdos Group in the northern region of Inner Mongolia, and Shanxi Coal Import & Export Group Co. Ltd., have provided guarantees for Decheng Mining to get loans.

Erdos Group said on June 14 that Qingdao Intermediate People's Court froze the 420 million shares in it held by Erdos Cashmere Group, which is 40.7 percent of the total. Bank of China's Shandong branch and China CITIC Bank's Qingdao branch applied for a similar freeze. Later, Erdos Group said Bank of China's Shandong branch applied to unfreeze the shares.

Chen's Investment

Chen was detained late April, shortly after the country's graft fighters launched an investigation into Mao Xiaobing, the party chief of Xining in the northwestern province of Qinghai, a source from a bank in Qingdao said. Chen was taken to Lanzhou for investigation, and he was put under residential surveillance.

Mao was investigated for "serious violations of discipline," a phrase that usually means corruption. The investigation was related to Western Mining, said a source close to the situation. Mao was the chairman of Western Mining and its listed subsidiary from 2000 to 2009. Western Mining's former vice chairman, Jiang Biao, was the subject of a corruption inquiry in early March, Caixin reported.

Chen bought 44.87 million shares in Western Mining for 3 yuan each in 2003, and in July 2006, he sold the shares to Beijing Anruisheng for an undisclosed sum before Western Mining went public in 2007, media reports said. Anruisheng sold out the shares in 2009 for 2 billion yuan.

Chen invested in many companies in different fields across the country, such as real estate, nonferrous metals and international trade. His companies invested in an aluminum company in Shenzhen and cooperated with China Power Investment Corp. in Inner Mongolia.

The subsidiaries of Dezheng Resources used informal methods in trade financing, said a source from a large bank. They carried out re-export trades without real deals happening to get loans from banks, and then they used the money to invest in the real estate industry. Since the end of 2013, his bank dropped business with Dezheng Resources in Guangdong and Xinjiang.

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