2012-09-07

China's steel ponzi

Here's Caixin on the steel ponzi. Remember this anytime someone says China's steel slowdown will be contained (and recall Bernanke's similar statement about subprime).

Bank Loan Tricks Stain, Strain Steel Sector
Some steel manufacturers and trading firms used product inventories as collateral for bank loans, then increased their money in hand by convincing another bank to exchange the lenders' acceptance bills for cash.

The strategy worked apparently because bankers between 2007 and 2010 too often failed to verify that acceptances were specifically tied to trading, said a Bank of China loan officer. The oversight apparently "fueled risky and speculative activities on the part of steel companies," he said.

Some steelmakers and traders, not satisfied with their own business realm, used stretched-out loans to buy speculative real estate in hopes of raising even more money, said Zhang Changhe, manager of the trader Beijing Ruisen Steel Co. Ltd.

Shanghai steel companies were especially busy investing in property with money raised by manipulating bank loans, said Wei Zheng'an, a steel analyst at Guotai Junan Securities.
Take out multiple loans on a single asset and use it to fuel speculation in real estate.
Steel traders alone last year borrowed about 1.89 trillion yuan from banks, accounting for 3.5 percent of the nation's 2011 loans in all categories, said Zhou Huarui, chairman of the Shanghai Steel Service Trade Association.

The strategy started unraveling, though, when steel prices fell and the value of collateralized steel products declined.

Moreover, a real estate market cooldown since 2010 has trapped speculators including steel companies without cash needed to repay loans.

"Their money is tied up in the property market," Wei said.
I'm a long-term bull on China, but there is a storm coming first.
Like many other steel company executives, Zhang faces a common predicament now that the good times for the steel sector have ended: His company can't meet its loan obligations and might file for bankruptcy.

What's keeping Zhang afloat, however, is that his bank is afraid that it might lose the entire unpaid portion of the loan. Bankers have told him to hang on and "repay as much as you can afford," he said.

钢贸融资劫

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