China Faces "Vicious Circle" As Commodity Collateral Collapses

Tyler Durden's picture

As we warned last week, stockpiles of iron-ore have reached record levels in China as end-demand slumps but, as Bloomberg notes, this is potentially creating massive dislocations in other markets. Record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. A stunning 40 percent of the iron ore at China’s ports are part of finance deals (having replaced copper after China's last shadow-banking crackdown) and with the glut, prices drop (driving down the value of collateral on loans) and "borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle."


As we noted last week, Bloomberg reports China’s record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market.

Iron Ore stockpiles ar record highs...


But Lenders seeking repayment are finding irregularities, including the same pile of materials used as collateral for multiple borrowings, China International Capital Corp. said.

Xiao Jiashou, known as the “steel-trading king” in Shanghai, had his assets frozen as China Minsheng Banking Corp. sues for money owed.


About 40 percent of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.

“The risk comes when metal prices fall by a large magnitude within a short time, driving down the value of the collateral,” Yang Changhua, a researcher with Beijing Antaike Information Development Co., said in a Feb. 19 interview. “Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle.”

And those prices are tumbling:

Steel reinforcement-bar futures in Shanghai have fallen 19 percent in the past year, while iron ore delivered to China’s Tianjin port dropped 22 percent

And non-performing loans are therefore - exploding (as we noted here)...

Traders began having trouble repaying loans when steel prices in China slumped 38 percent in the seven months through August 2012 as the economy slowed. In the southern city of Foshan alone, local banks have given 100 billion yuan in credit to steel traders, Caijing magazine reported this week, citing a local banker it didn’t name. Loans to the sector helped drive non-performing loans in Yunnan province to 5.86 percent as of November 2013...


At China Citic Bank Corp., bad assets surged from 2011 to 2013 mainly because of non-performing loans to the steel-trade industry, Moneyweek magazine reported on Feb. 17, citing bank President Zhu Xiaohuang. The lender said on Dec. 12 that it plans to write off 5.2 billion yuan of bad debt for 2013.


At least a third of China’s 200,000 steel-trading firms will collapse as part of the credit crisis which started at the end of 2011, the official Xinhua news agency said Feb. 7, citing industry estimates. Nanjing Iron & Steel Co. said last month its 2018 bonds may stop trading due to losses.


Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.

But no matter how much the PBOC cracks down, only one thing matters:

Those cash-starved steel mills or trading firms don’t care whether steel or iron-ore prices are falling,” said Zhang Jizhou, a trader at Ningbo Future Import & Export Co. “Their priority is to get cash flow so they can survive.”


So the shadow-banking system filled the gap as prime lenders disappeared...


Which means, howevere well intended, the PBOC is exacerbating the situation that many have drawn ugly comaprisons to the subprime-lending bubble in the US.

Simply put, the 'clever' people in China - having had their copper financind taken away, have shifted to steel - as the following diagram explains (just replace Copper warrants with Iron Ore...)


Which will end just as disastrously... unless of course, China once again unleashes the ghost cities building spree. Which it inevitably will: after all it has become all too clear that not one nation - neither Developing nor Emerging - will dare deviate from the current status quo course of unsustainable, superglued house of cards "muddle-through" until external, and internal, instability finally forces events into a world where everyone now has their head in the proverbial sand.


The big question is then, does China re-ignite huge inflation in an attempt to save its vicious-circle-facing economy or does the "pig in the python" get expelled first as fast-money carry leaves en masse and crushes collateral values...

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DoChenRollingBearing's picture

I live near a city with lots of Latinos but few Orientals.  I am waiting to see if/when the Chinese start buying high-end real estate around here.  That would be good for our real estate values here, while much of America's is down...

knukles's picture

Don't know how that's workin' out in SoCal....

The Vineyard's picture

I want the Chinese government to pay so I can have my teeth fixed.  Bitches.

macholatte's picture



Somebody splain this 2 me:

Look at that chart where inventory was high Jun, 2011 - Sept, 2012 and then it fell sharply for 6 months. Now, a year later, the inventory is back to what it was.  Why is this a “problem” now and was not a problem 6/11 - 9/12?

What would be a "normal" inventory?


Cdad's picture

I think normal inventory would be the amount of ore/steel needed to build cities that people actually live in, such that there was cash flow coming from the city, so that cash could be used to buy more ore/steel to build more actual demand.

But since China has built a multitude of cities that no one lives in, for which there is no cash flow, which also indicates a lack of demand for more cities...I think we can safely say that "normal" inventory is.....a lot less than "record all time high stockpiles."

But maybe that is just me...talkin' common sense as a useless eater that is not part of the "best and the brightest" banker set which allows for such things as rehypothecated piles of iron ore...that no one needs.

Vampyroteuthis infernalis's picture

When the last financial crisis hit, it was the US and Europe. The Fed and ECB jumped up and pumped Benniebux into the system and saved us from the crash continuing.

This time is will occur in a foreign market the Fed and ECB has little say in, like China. This is the next crisis' source and Mr Yellen will be helpless to stop.

0b1knob's picture

When we reach the point where there's blood in the streets will that be the menstual cycle?

idea_hamster's picture

What's wrong with copper- or iron ore-based shadow banking?

Isn't that a private monetary system backed by metal?

El Vaquero's picture

Not quite.  It's using metal that is priced in a debt based fiat currency system as collateral when the price of metal in that currency is subject to change.  They are not saying "this note can be exchanged for one ton of iron ore."

akak's picture

God, just think of the coins!

El Vaquero's picture

I don't know just how much steel you can get out of your typical ton of iron ore, but I bet the coin made from that would be big enough to eat a hole in your pocket.

akak's picture

Actually, the largest metallic coins ever issued were large copper plates "minted" by Sweden in the 17th and 18th centuries due to a local lack of silver and gold, with the largest of them weighing upwards of 40 pounds.  I'm not sure to what extent they actually "circulated", but the changepurses involved must have been enormous:


MisterMousePotato's picture

Even weirder: Micronesian Rai stones:

Or maybe not so weird compared to what we're doing? I'm not sure I'm qualified to judge anyone anymore about such matters.

Ranger4564's picture

We have come full circle, so to speak, with virtual currency and virtualization of currency... both the ____coins and our own fiats in banking networks. So in a sense, we're doing what the Yaps are doing. Word of mouth. :-)


disabledvet's picture

you're gonna finance a steel mill with payday lenders?

i mean c'mon folks...we need to be serious here.
I have been laughingly stating for years now that "this will all be financed by Morgan/Stanley." (meaning "everything. including moon bases.)

Obviously after the Facebook deal...perhaps "ludicrous speed" has some merit after all.
But alas..."you can't finance a Chinese steel mill with" (insert reality television show here.)

That takes not just credit "but the extension of there-in."
This is what QE has been all about folks...the Fed as "frontman" for the entirety of Wall Street...providing collateral not just for the entirety of the US economy but for the bulk of the global economy as well it would appear.

Was the purpose to create the next bubble?
Maybe in egos.
But that's about it.

Many a thing were suppose to go wrong with this "Enterprise" but near as I can tell...even with The Program now winding's not because QE "failed" per se. (the inflation appears to be in Venezuela and Argentina, yes yes?)

Interestingly "Taper" might be another "great idea who's time has come" as well. Sorry but..i am just human folks. "I cannot account for time in my speculations." Some "things" just happen. We know not why.

americanspirit's picture

Hi DoChen - I have a small ranch in Texas with great old stone buildings, live water springs still running strong even in the drought, good topsoil, friendly (but not too close) neighbors, and close proximity to both Austin and San Antonio. My wife and I are in the process of getting ready to sell the property and move on, and just for fun I have listed the property for $5 Million on both CraigsList Tokyo and Shanghai, (free listing) payable in gold US Eagles only - no tungsten bars. Non-negotiable price.

Of course the property would bring less than a million USD to a US buyer, but I figure hey - why not give it a shot? Ya never know.

TeamDepends's picture

Today value shimmer filter

waning on the vine

no good fortune cookie

NoDebt's picture

At least tulips were perishable.  That iron's going to be around a while.

PT's picture

I wonder, at what point does that iron-ore become so cheap that it is cheaper to buy it from China than to dig it out of the ground here in Australia.  You know, and then we sell it back to them ...






But if the iron ore has been rehypothecated, doesn't that mean that demand increases when everyone demands delivery ... and prices go up?



Maybe through a clever combination of stock-piling and rehypothecation, the price can stay the same ...

You should try some of my idiots pills.  They are especially delicious today!

Cacete de Ouro's picture

So Tylers, how are China's (central government) gold imports and stockpiles financed?

Not a trick question, just interested.

I would say there is no margin/borrowing/collateralization. Any central stockpile is cash on delivery and then remains free of liens, claims and incumbrances, hypothecation and rerere-hypoth

Cacete de Ouro's picture

Hey, something for nothing. Taiwan's 400 tonnes of gold is held in .....Taiwan...and is not lent out to any bullion banks ...or so they told a certain someone... You heard it here first

Fix-ItSilly's picture

Enron is to Raptor as US is to China.

LetThemEatRand's picture

I'm starting to think that the Chinese government doesn't care much about these events.  The West is obsessed with this quarter or that, whereas the Chinese think in terms of years or decades.   They have become a world manufacturing power and if history is a guide, that is a recipe for long term success.   The one thing they have in common with the West is that individuals who don't run the show are entirely expendable.

akak's picture

The supposed Chinese penchant for distant planning and long-term thinking is often bandied about, yet I have to wonder where their "long-term thinking" was envisioning in the midst of the "Great Leap Forward (into Starvation)", or during the so-called "Cultural Revolution" (Cultural Destruction).

LetThemEatRand's picture

Worked for the leaders.  And I'm not suggesting the Chinese are superior in any way on an historical basis.  I'm just saying that their current vision of building an industrial base on the backs of cheap labor is likely to pay well for the leaders.

akak's picture

I certainly can't argue with you there.

PT's picture

I, too, tire of the Chinese "long-term planning" nonsense.  If my plans don't make sense within the next 50 years, then they are no good to me what-so-ever.  Good for my descendants (if I had any)?  Go ahead, plan away.  But tell me again, what did we learn about complex, re-iterative Chaotic systems???

The propaganda is a repeat of the '80s where everything the Japanese allegedly did was worshipped as most Supreme, Holy Genius of perfection.  Don't hear about that any more, do we? 

Cacete de Ouro's picture

The Rothschilds and the older Austrian and Venetian families have a long term plan. It's pretty simple. Don't tell anyone how rich you really are, and don't attract attention. O, and also , put most of your absolutely massive wealth into Trusts with multiple layers of control...

LetThemEatRand's picture

Yes, the true power in the world also has a very long timeline.  The Chinese were here first, but who will be left standing is anyone's guess.

Semi-employed White Guy's picture

With the known Asian penchant for gambling, I also throw the BS flag on the "Chinese are ultra-long-term strategic planners" meme.

FredFlintstone's picture

"Chinese have no plan"...quote from the smartest Chinese person I know.

PT's picture

Just tell 'em you have a reallllly looooong term plan and enjoy the confused look on their faces.  Who knows, you might eventually get lucky, at which point you say, "See!  That is because of my plan!"

zaphod's picture

Are they Chinese thinking in terms of years or decades as they posion every river and water source? The notion that the Chinese are super humans beyond making horrible stupid decisions is just nonsense. 

akak's picture

The flow of river pigs points the way to the Chinese Citizenism glorious future!

PT's picture

To the Chinese, pigs symbolize prosperity and good luck, don't they?  Abundance for all!

Or as we like to say in the west, "Bullish!" 

Leraconteur's picture

They do. Unlike in Muslim cultures where pigs are dirty animals, in China pigs are 'cute' and admired and eaten by the millions.

ptolemy_newit's picture

They are not planning. they are reacting to the events given them with the 20 years of the USD decline!, Now that trend is changing as planed.

Sorry Boris I do need to repost ( relevent and funny:)

Boris seeing not the picture enough big!

It currency and economic and political and religious war! US foreign policy start fire in countries many these years what for you can ask? Scared little country of other empire to take shape!     Middle East empire could big Islam hate interest on money loan so jrewish would be like crazy against competition for money loaning skimming middlemen.

Euroconflictunity only 12 countries must be and club med no holiday because poor hair north people get the stickler. So ussa need euro at 1.5.

The new money comes from the coldest places before and after the tropic lines.  We think like Siberian Aduu to mate with slimmer women of east.  New word for this empire growing is CRAMSTAN – China, Russia and Mongolia with many stans.

So pump and dump of commodities necessary would be by last stand of culling the peak problem of people.  USSA feral bank has new orders to crash system after C of CRAMSTAN get big full of spending money on things that are raw.


Sure time they take to arrange tracer currency new that has no paper needed.

Leraconteur's picture

Unknown. Opacity is difficult to penetrate to see the big picture. What I can tell you is this:

China recycles just about everything.

Now, as with everything else, this isn't recycling like in Denmark or Germany. What this is, is the economic imperative forcing seniors to collect cardboard, or plastic bottles, or styrofoam, or plastic bands for securing appliance boxes, or the appliances themselves, and recycling them, selling them to a middle man who then has them hauled off. Seniors on pensions of $30 a month have no choice. Even with free housing and cheap food, a person in China needs $100/month min to survive. Scrapped autos, electronic dump trucks, electronic tricycles, eBikes and such are also hauled off for the metal. Door frames from demo'ed buildings are pulled and resold at a scrap lumber yard. Windows, fixtures and anything of value, also. Bricks, beams, tiles, even used 3/4inch PVC from the bath.

I have been told this is then dumped, but I have seen many Chinese landfills and dumps and the only things left inside are tiny bits of plastic and those useless pernicious plastic bags. In China they are razor thin and useless for anything. Perhaps burning.

This detritus is likely being recycled and reused.

Water is the same way. Yes, they are pumping their lakes dry, but this water goes into a nearly closed local loop on the local scale down to cities of 20,000 in size. Grey water systems all the way. Do NOT drink the tap water, it most definitely IS treated water from your toilet and it tastes like it. Treated, sterilised, watered down urine. They pair the sewage treatment plants with fertiliser plants (across the street) and use the vactor sludge to make fertiliser that is bagged and put on the land to make food. The cycle compleats.

Food in restaurants? All that excess not eaten to show everyone is Emperor and wealthy? It's not wasted. It all goes into slop buckets, someone comes by at the end of the day and tosses into a large slop tank, and this is used to feed pigs or make gutter oil. The oil is bad, of course, but feeding the pigs is good provided no flu disease gets in the loop.

This is why flu bugs come from China. Humans contaminate food>pigs eat it and bird poop from sick birds>pork is eaten by humans.

But waste? Really not much of it.

Sure, this is gonna be a problem and very soon, but they don't flush water down the drain and into the ocean. It all goes to the local muni treatment facility and then back into your pipes or into local groundwater. Keeping that water clean, in a closed loop, well that explains the heavy metals content. Closed loop, like a spaceship. Concentrations will only increase.

Like so much in China, it's a closed loop removed from outside influence.

Should they ever get LFTR up and running they will have all the power needed to desalinate the China Sea. Problem gone.

China is interesting to watch. The number of things that could go wrong is immense. But if they get it RIGHT...USA/West stands not a chance.

MeelionDollerBogus's picture

You eat the coastal sea food and you'll probably have Hep C in a week.

SOMETHING is getting flushed into the oceans.

MeelionDollerBogus's picture

Indeed. We, many, mistakenly thought of the 'superior' Japanese with their progression through the 80's and now we can see they are in fact a very obedient sheeple. It took Fukushima to show it but it's the truth. The initial tsunami saw people go to their designated shelter areas and one of them was Fukushima. Like obedient sheep, they went.

Spungo's picture

Those crazy iron bugs

q99x2's picture

And I don't eat iron ore.

Why don't they try storing protein powder and almond milk for collateral.

Could use a little deflation in that area.

Leraconteur's picture

They could rotate into Gold as the next collateral.

ThroxxOfVron's picture

...& would promptly be distorted if not destroyed in a tsunami of well established re-hypothecation schemes such as the double/multiple pledging of a stock-pile as was the case in copper and is now the case with iron-ore, and/or from 'anglo/western' style paper gold and derivatives scams or the replication thereof in their own banking and shadow banking systems...

Physical would be locked in vaults that people would not be allowed to tour.  -same as in the 'anglo/western' system.

Physical would be audited by respected accounting firms or the vaults themselves.  -also same as in the 'anglo/western' system.


A fractional reserve Gold collateralization regime does not offer a panacea in my opinion.

Leraconteur's picture


What if they let people visit the vaults and tour them once they get 15,000 tonnes or so on hand.

Would that suffice?

That would stick it to the USA and petro-dollar.

MeelionDollerBogus's picture

depending on how bad the loan collateral is to the loans & how many are non-performing, later, using gold, it could stick it to the PBOC as well. They have their own brand of corruption-citizenism and their own roadsides, no matter the nonsense of Mr. Yellen, Bank of Bernank & the Paulson Heist.

Seeking Aphids's picture

Looks like a given that China will go the inflation route, inject tons of liquidity into the system in an effort to avoid crises that could be used as an excuse for the next revolution....the Chinese government is always looking behind its back - comes with the territory if you are an unelected oligarchy. But will we in the West even notice with all the money printing going on here? If Europe decides that it is ok to monetise its debt then we should really see inflation take is that or this never never land of pretend growth but actual recession that we have been living in for the last 6 years......Yellen really needs to stop paying interest to banks for holding QE money.....get it flowing into the economy and get this show on the road......this spinning of wheels has gone on long enough.

Fix-ItSilly's picture

Taleb's "Fat Tony" says parties are not all independent. Process was to also hide international wealth transfer fraud between communist and capitalist entities. "Brooklyn Bridge" was probably bought over and over again by German and French banks.