As if confidence in China’s cooling economy wasn’t bad enough, big foreign banks are now worried they’ve fallen victim to an elaborate commodities scam.
When a U.S. bank decides on whether to give you a business loan, it looks at things like profitability and future cash flow. In China, banks focus on one thing: collateral.
"So that means you have something valuable and you give it to the bank provisionally, and they can take it if you don’t pay back your loan," says J-Capital’s Anne Stevenson-Yang.
Chinese companies often use things like copper or aluminum as collateral. It’s helped secure $160 billion worth of loans in the past few years. But in the Chinese port of Qingdao recently: a discovery of commodities-backed loan shenanigans.
"People found out that the same batch of copper had been taken to more than one bank to take out a loan," says Sijin Chen, commodities analyst for Barclays.
Chen says China’s government has tried to clean up this practice in the past, but "these government-driven initiatives are never going to be successful if the banks don’t think it’s a risky business."
They do now.
Foreign banks like Standard Chartered and Citigroup have sent their people to Qingdao to see if these warehouses of copper actually exist. So far, the government is too busy with an investigation to let them check. Stevenson-Yang says this fake-commodities scam is just the latest problem for China’s economy.
"China is deflating and everybody’s running around trying to make their particular asset valuable or shore up their particular loan, but the fact is it’s like taking your kickboard and holding it up against a tsunami."
Her message to foreign banks in China: You’re going to need more than a kickboard.