Ghost steel stocks haunt China’s banks

Heavy metal ... Reuters reports that Chinese authorities are investigating a number of cases in which steel documented in receipts either belonged to another company or was pledged as collateral to multiple lenders. Photo: Qilai Shen

While China’s ghost cities may not be as scary as first thought, spectral steel stocks are causing trouble for Chinese banks and other companies looking to grab hold of collateral against loans that have gone into default.

Reuters files an extensive report on the problem, which comes as steel prices hover around three-year lows and as economists and analysts continue to debate the likelihood of China unleashing another massive round of stimulus.

“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,” Reuters reports Chinese steel industry sources as saying.

“Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world’s steel and has over 200 million metric tons of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.”

The steel sector was already causing trouble for China, as it was a major recipient of stimulus payments in 2008 despite not needing the money. As a result, many steel traders – some of which funnelled unneeded stimulus cash into investments such as real estate – are now grappling with large debts, exacerbating China’s bad loan problems.

Among the quotes in the Reuters article:

• One steel trader says: “What we have seen so far is just the tip of the iceberg ... The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry.”
• Another Shanghai-based says: “We have suspended business for days as we are afraid we won’t be able to get any stocks from the warehouses if we get a fake receipt.”
• An unnamed Shanghai-based bank branch manager says: “Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans.”

Reuters goes on to report that industry sources estimate cases amounting to about 5 billion yuan ($US787.5 million) of bad debt in Shanghai have already come to light.

The full story is available here.

MORE CHINA NEWS:

• The case against more Chinese stimulus
• Why you shouldn’t fear China’s ghost cities
• China has a debt problem too

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