Petrochemicals latest China commodity to be hit by potential fraud

Wed Jul 2, 2014 9:00pm GMT

By Chen Aizhu and Judy Hua

BEIJING, July 3 (Reuters) - Chinese petrochemical imports have become the latest commodity financing tool to come under investigation for possible fraud, highlighting the risks from the widespread use of raw materials as collateral to raise loans and skirt credit restrictions.

Commodity financing deals in China, which Goldman Sachs has estimated to be worth as much as $160 billion, have come under close scrutiny after an alleged metal financing fraud at Qingdao Port, a huge trading hub in eastern China.

Now police in northern China are investigating another suspected fraud at Tianjin Port near Beijing, police and trade sources said, involving "mixed aromatics", a refinery product commonly used for blending petrol.

The use of commodities, from traditional copper sheets to perishables such as soybeans and rubber, to raise finance has been increasingly popular in recent years as Chinese policymakers have sought to tamp down rapid credit growth.

That has added to the build-up of credit in the so-called shadow banking system - trillions of dollars in non-bank lending that is seen by analysts as one of the key risks to China's economy - and also increased the potential for fraud.

In Qingdao, China's third-largest port, police are investigating whether a private metals trader, Decheng Mining, had duplicated warehouse receipts so that a cargo of metal could be used multiple times to obtain financing.

The concerns raised by that investigation have forced banks and trading houses to consider new controls in the country's massive commodity financing business, which traders say could lead to the drying up of credit for all but large firms and state-owned companies.


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