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.
The Tianjin case appears much smaller, but illustrates the breadth of the use of industrial materials in financing.
A local unit of state-run PetroChina's trading arm Chinaoil, paid more than 40 million yuan ($6.45 million) for about 4,000 tonnes of mixed aromatics stored at a tank in the city, according to a Chinaoil source and another trader who frequently does business with the firm.
But when Chinaoil, which is not suspected of any wrongdoing, went to take delivery of the cargo around mid-May it found it had been impounded by the authorities.
The case, involving a private Chinese fuel company and a trader suspected of contract fraud, is now under police investigation, according to two police sources and traders.
"Chinaoil went to the police after realizing that the 4,000 tonnes bought could not be delivered," said the Chinaoil source, who has direct knowledge of the case. Chinaoil officials and a PetroChina spokesman did not respond to calls or text messages seeking comment.
Details of the alleged fraud remain unclear, but the two trading sources said it involved at least one 30,000 tonne cargo worth around 300 million yuan ($48.3 million) stored at a tank in Tianjin. Chinaoil's purchase was part of that cargo, they said.
The sources said the certificate of ownership Chinaoil received on payment may have been duplicated. The investigation was looking at whether the same lot was sold to multiple buyers, and whether it was used to raise loans, they said.
Chinaoil has since banned its regional offices from trading mixed aromatics, allowing only traders at its Beijing headquarters to deal with the fuel, said the Chinaoil source.
At least two other, private companies were also potential victims of the suspected fraud, the sources said.
Mixed aromatics, also known as reformates, have become increasingly popular as a financing tool in recent years, as China has tightened credit and companies look to profit from interest rate differentials.
Typically, importers buy a cargo using a letter of credit obtained from a bank at a low rate of interest.
They then sell it on the domestic market, often at below-market rates, for quick cash to be reinvested in high-return areas such as real estate or shadow banking, where the gap between returns and funding costs could be as much as 10 percentage points.
"It's a play on interest rates arbitrage ... so long as the profits made in loans or currencies can cover losses in selling the oil in the physical market," said an oil trader.
Reformates - also used as a feedstock, or raw material, to produce petrochemicals - are popular because of their high value per shipment and the ease with which they can be traded.
"The product needs to have enough liquidity so it can be sold in the market quickly," said the trader.
Unlike the controlled crude oil market, companies do not need import licences to bring mixed aromatics shipments into China, while trading of other petroleum products, such as diesel and kerosene, is dominated by only a handful of state companies.
Imports of mixed aromatics soared after the 2008/2009 financial crisis to peak at 3.6 million tonnes in 2011, as dealers cashed in on tax incentives. China did not levy consumption tax on the product until early 2014.
Imports have fallen since as the consumption levy wipes out the earlier profit margins, but the lure as a financing tool has helped hold levels up at close to 3 million tonnes a year for 2014, traders estimated.
Several main players - little known private firms - were believed to be holding around 400,000 tonnes of stocks, said a second Beijing-based trader.
"Any commodity that sits in storage for long, you could reasonably suspect it as being used for financing," said a second senior trader. "Mixed aromatics is one of those."
Fuel oil, of which China is Asia's top importer, is harder to use for financing as it incurs higher storage fees, traders said. ($1 = 6.2119 Chinese Yuan Renminbi) (Additional reporting by Florence Tan in Singapore; Editing by Alex Richardson)