Steel trade meltdown

By Chen Yang Source:Global Times Published: 2014-2-14 0:08:01

Two men work at a port in Qingdao, East China's Shandong Province on January 3, 2014. Photo: CFP

 Two big steel traders in Shanghai will face a series of lawsuits in the next few months, highlighting the mounting credit crisis in the steel trading sector.

Xiao Jiashou, known as China's steel trading king, will face 22 lawsuits filed by banks including Ping An, Minsheng and Industrial and Commercial Bank of China in the next two months, according to the Shanghai High People's Court website

Zhou Huarui, chairman of the Shanghai Steel Service Trade Association, will also face 18 lawsuits between February 18 and June 12 initiated by banks such as Minsheng and China Everbright Bank.

Xiao and Zhou came to Shanghai in the 1990s from Zhouning, a small, poverty-stricken county in East China's Fujian Province and seized the opportunity to become steel trade moguls involved in mass infrastructure construction in Shanghai's Pudong New Area.

Their success attracted nearly 70,000 Zhouning people to join the steel trading business in Shanghai where they gradually formed a tight-knit community.

Zhouning Chamber of Commerce in Shanghai has 1,673 member companies, creating more than 60 steel trade markets in Shanghai and neighboring provinces, according to chamber data. 

Frozen assets

The amount of debt Xiao and Zhou is involved in is not clear, and they were both unavailable for comment. Part of Xiao's assets has already been frozen by a court in Shanghai.

Shanghai-listed Ningxia Xinri Hengli Steel Wire said in a filing late Wednesday that the company's actual controller risks being replaced because 80 million shares, or a 29.2 percent stake, held by its largest shareholder - Shanghai Xinri Equity Investment Co - had been frozen by Shanghai Pudong New Area People's Court.

Shanghai Xinri used to be controlled by Xiao. The freezing order was because Shanghai Xinri assumes joint liability on its credit guarantee activities, the filing said, also noting that Shanghai Xinri and its actual controller are persuading debtors to repay bank loans as soon as possible.

Webs of credit

According to a separate filing on January 30, the same court also froze Xiao's 31.07 percent stake in Shanghai Xinri Equity Investment, worth 460 million yuan ($75.85 million), due to his loan dispute with Minsheng Bank. 

Industry watchers said the lawsuits filed against Xiao and Zhou were often triggered by webs of credit guarantees among Zhouning merchants. 

"Big steel traders guaranteed the loans of smaller steel trading firms, and sometimes traders used property as collateral to several banks at the same time," Zhang Lin, an analyst at Beijing Lange Steel Information Research Center, told the Global Times Wednesday.

"The close relationship helped Zhouning merchants have easier access to loans," she said. "But if one of them meets problems, it is very likely to have a domino effect."

The growing number of lawsuits Chinese banks have taken against steel traders have exposed flaws in China's 4 trillion yuan economic stimulus plan in 2008 following the global finance crisis, analysts said.

"Steel traders went on a borrowing binge between 2009 and 2011 fueled by the stimulus. Then a lot of them used the loans to invest in real estate and the stock market," Liu Xinwei, a steel industry analyst with Shandong-based consultancy Sublime China Information, told the Global Times Thursday.

The risk of steel trade loans began to emerge in 2012 when more than 20 Shanghai-based steel traders were sued by banks as they failed to repay loans.

"China's steel sector has been suffering from falling steel prices and shrinking demand since 2011 when the domestic economy started to slow d0wn and industrial overcapacity made things worse, squeezing margins of steel trading firms," Zhang from Lange said.

Also in April 2012, the China Banking Regulatory Commission warned about excessive loans to steel makers and traders. As banks tightened credit to steel traders, some steel traders were reported fleeing out of the country or committing suicide.

The number of lawsuits against steel traders surged in 2013. In April, Shanghai courts opened 209 lawsuits between banks and steel traders, and the number rose to 302 in August,  financial information portal reported Monday.

The crisis has gradually extended to big steel traders from smaller ones, Liu said. According to a Xinhua News Agency report citing insiders on February 7, about one-third of China's more than 200,000 steel traders will collapse as the loan crisis emerges.

Analysts said the current credit crisis among steel traders has little influence on steel mills.

"But if a large number of steel traders are eliminated from the market as Xinhua estimated, steel mills' sales will be dragged down," Liu said.

Default crisis

The banks' rush to recover loans has indicated their concerns about accumulating bad debts, banking analysts said.

China CITIC Bank's outstanding loans in the steel trading sector reached about 40 billion yuan by the end of June 2013, with the non-performing loan (NPL) rate surpassing 8 percent, data obtained by the 21st Century Business Herald showed Thursday.

Minsheng Bank's NPLs in the same sector amounted to 1.1 billion yuan by the end of March 2013, accounting for 3.6 percent of its total loans to steel traders, the bank said in April. No further data is available.

The risk of steel trading loans was not obvious last year as banks pushed down the NPL rate, but it will finally be fully exposed in 2014, Lian Ping, Shanghai-based chief economist at Bank of Communications, told a media briefing on Tuesday.

Lian's prediction is based on recent moves by banks to write off NPLs, finally showing up as losses on their financial reports this year.

"With the involvement of big steel traders like Xiao, the loan crisis in the steel trading sector is almost at its peak," Wang Mingfei, a banking industry analyst with Shanghai-based Oriental Securities, told the Global Times on Wednesday.

As loans to the steel trading sector amounts to only a small proportion of Chinese banks' overall loans, Wang noted, the potential defaults by steel traders will not threaten the stability of the financial system.

"However, the default crisis is likely to extend to more industries struggling with overcapacity if the economy continues to be sluggish," he said.

Posted in: Insight

blog comments powered by Disqus