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Published 18 September 2012 09:25, Updated 20 September 2012 04:15
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:
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.
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