Fri, Jul 04, 2014 - Page 15 News List

PRC financing fraud probe expands

QUESTIONABLE COLLATERAL:Authorities are trying to determine if ownership of a cargo of mixed aromatics was sold several times, and the profits used to raise loans

Reuters, BEIJING

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 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 gasoline.

In Qingdao, which is China’s third-largest port, police are investigating whether a private metals trader, Decheng Mining (德誠礦業), 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 Ltd’s (中石油) trading arm China National United Oil Corp (Chinaoil, 中國聯合石油), paid more than 40 million yuan (US$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.

However, when Chinaoil, which is not suspected of any wrongdoing, went to take delivery of the cargo around the middle of 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.

Details of the alleged fraud remain unclear, but the two trading sources said it involved at least one 30,000 tonne cargo worth about 300 million yuan 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, the Chinaoil sources said.

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.

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