China's Port-Ponzi-Probe Spreads To Entire Warehousing Sector

Tyler Durden's picture

"The banks still haven't looked under the hood," warns one executive as the probe at Qingdao port (centering around the duplication of warehouse certificates in order to use a metal cargo multiple times to raise financing) begins to spread to the entire Chinese warehousing sector. As Reuters reports, even if banks or their customers have insurance for the metal, some warehouse sources said they might struggle to get paid if fraud is uncovered or their agents are implicated. Though many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations. That appears to have back-fired. One thing looks certain, however, banks involved in commodity financing in China are set to charge higher fees: "The cost is certainly going to go up, whether it's going to be from local banks or international."


As Reuters reports,

Shaken by a fraud investigation into metal financing in the world's seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China's sprawling warehouse sector.


The probe at Qingdao port centers around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing.


China's roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere.

And the concerns are spreading...

"The banks still haven't looked under the hood," said an executive at a bank involved in commodity financing in China, referring to China's warehousing sector.

And the legal troubles are growing...

"Warehouse receipts are not title documents, they are documents of entitlement. But they are being used as title documents for sales and purchase and transfer of ownership," said a person at a warehouse company with operations in Qingdao.


Everywhere else outside of China, a warehouse receipt is cut for one party."


A source at a Western bank with direct knowledge of Qingdao said warehouse firms should bear the brunt of responsibility, while a senior official at a warehouse firm at the port said responsibility "remains very much up in the air."


A lawyer, who has previously been involved in litigation over fraudulent warehouse receipts, said banks primary recourse would be against whoever had forged receipts.


"But if the fraudster is gone, the bank may decide that it wants to go against the warehouse," said the lawyer, who did not want to be named because of the sensitivity of the issue.

The relocation of whatever metal there is has started...

Traders said there was a risk the metal could have been already claimed before part of Qingdao Port was sealed off, adding that at least two trading houses had moved metal out as soon as news of the scandal broke.


Some banks have asked clients to shift metal, used as collateral for loans, to more regulated London Metal Exchange (LME) warehouses outside China or those owned and operated by a single warehouse firm to limit their exposure.

But the LME appears a little nervous...

the Qingdao probe has prompted some movement of metal to LME-approved warehouses in locations such as South Korea.


The LME, which is owned by Hong Kong Exchanges and Clearing Ltd, has approved more than 700 warehouses and storage facilities in about 40 locations globally.


"The extension of the LME's warehouse network into mainland China is an important issue for the LME and its users and we alongside HKEx put a high priority on this initiative,” said a LME spokeswoman.


But the reverberations from the Qingdao probe may not be clear cut, since global warehousing firms potentially exposed to the scandal are licensed by the LME to operate in other ports. The LME declined to comment further.

One thing is sure - credit is tightening and costs are rising...

"The cost is certainly going to go up, whether it's going to be from local banks or international,” said analyst Colin Hamilton of Macquarie in London.

This is not over.

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Squid Viscous's picture

bullish! for PM's that is, but i'm sure they will be smacked down overnight ...

Pinto Currency's picture



Awaiting BofA paper saying this is bearish for silver with the sustained 5% physical silver premium in China as proof of the bear market.

NotApplicable's picture

Porta-Potty probe?
Need moar beer.

CH1's picture

"The banks still haven't looked under the hood," warns one executive

And they'll avoid looking under the hood as long as they can.

ThroxxOfVron's picture

Maybe they aren't looking 'cause they already know that there's no hood to look under.


Oracle 911's picture

Somebody will get the "not so much magic" bullet.

(I mean somebody will be executed.)

Vampyroteuthis infernalis's picture

"The banks still haven't looked under the hood," warns one executive

The engine has been gone for years!

Winston Churchill's picture

Screw the hood, whats in the trunk ?

kaiserhoff's picture

This is not over!

Well done, Tylers..., and all this bitching around here because we can't print our own fiat.

Just waltz on over to the  X-rocks machine and duplicate some warehouse receipts.

Party on Dudes.

kaiserhoff's picture

"Warehouse receipts are not title documents, they are documents of entitlement. But they are being used as title documents for sales and purchase and transfer of ownership," said a person at a warehouse company with operations in Qingdao.


Everywhere else outside of China, a warehouse receipt is cut for one party."

 One tickee - one laundee?  Where's the happy joy, joy in that?

Mo bettah have lotsa beaucoup tickees.  Everyone share the same set of bloomers.  N'est-ce pas?

Well maybe not, but if you have warehouse receipt you have collateral for loan, and you can BORROW,

which is much better than cash, because with cash people actually expect you to pay for shit.

I think I need another round.  Wenchlyyyyy..

knukles's picture

...never one cockroach.... 
Pass the MSG


But never fear.  CNN is rooting for war, the talking heads somewhere else are saying this can be won with the right military strike(s), CNBS is pumping, the statistics are all great, China doesn't matter except when it matters good... John Kohn has brokered peace just before we strike to the heart of the New Caliphate...

disabledvet's picture

It is not out of the realm of possibility that this starts a Civil War in China.

Of course they're buying gold...of course "where is that gold?" is the question of the hour.

"The answer is in JP Morgan's old HQ in Lower Manhattan."

That adds to the stuff that's already flooding in from Europe as part of "Putin Mania." (Yet another reason to get off that meme. It makes no sense to be long gold/long Putin.)

Say hello to Holy Shiite too?

I do agree the dollar has pretty much collapsed again. Only the yen makes the dollar look viable. If China collapses however that will make Putin a very lonely figure indeed.

Might want to pull that Huge Map Of Russia down too. "Nobody runs that thing."

kaiserhoff's picture

Pull the map down?  I sometimes want to go wooly mammoth hunting in Siberia,

  but by morning I'm sober.

Otto Zitte's picture

Are you 5-0 that the US civil war was a coup engineeered by the British, in not the only attempt to reacquiring the resource? Think, Man. Act.

philipat's picture

"Need moar beer."

You're in the right place, Qingdao beer is execellent.......

stocktivity's picture

It's all Bullshit!!!   The CNBC cheerleaders are dusting off their pom poms tonight... Turbo Tuesday = Dow 17000 tomorrow.

Seer's picture

Tick, tick, tick...

hobopants's picture

Just like Germany and their gold, they don't want to know it seems. That's always a healthy way of handling it....

Oldwood's picture

Delusion is the only thing keeping the world's economy afloat.

Seer's picture


The sooner we come clean on the nonsense that is perpetual growth the sooner that we can go about being honest about what to.

disabledvet's picture

"Mother Prussia."

You're talking 100,000 acre estates.

"As a starter property."

We haven't had Land Barons like that since the US in the 19th Century.

I've been East of Berlin. "Makes Iowa seem crowded."
Poland, Belarus, Ukraine...these are truly massive swaths of "Landers."

You'll need a security detail of course.

NoDebt's picture

What is it with warehouses lately?

I blame Blythe Masters.  Just her.  Nobody else.  Another rogue trader doing it all, everywhere in the world from their computer screen.

Goldilocks's picture

Credit default swap

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in 1994.

hobopants's picture

Yep, it's like taking insurance out on shit you don't own, because there is no potential for fraud in that, right?

Seer's picture

And the insurance can at best only cover a small percentage of problems.

It's like the rats are thinking that if they don't jump ship that they won't be spotted, never seemingly comprehending that they're all on a sinking ship!

"The secret plan is that we're going to keep doing exactly what we've been doing, for as long as we can."

- Daniel Quinn, in, "What a Way To Go"

ThroxxOfVron's picture

C'mon, Folks; who the hell makes legitimate loans for millions of dollars against a photcopied warehouse receipt?

The Banksters were committing the same old frauds, originating loans they knew could/would never be paid back, took their bonuses for originating the 'loans' when they originated the 'loans'; and they are now acting shocked and surprised because that is what the complicit 'Regulators' and Bankster upper management expect them to do when their frauds unravel.

Those weren't loans; Everybody printed up counterfeit money for Themselves and their Cronies via unbacked credit expansion.  It's a hybrid counterfeiting/inflation theft.

It's called Control Fraud.

Seer's picture

And it's still in the news:

MBIA says Credit Suisse hid crucial documents in U.S. mortgage case

Monday's filings included more than 500 pages of exhibits that MBIA said may support its claim that Credit Suisse hid defects in securitization practices before the financial crisis, reflecting the bank's desire to sell more securities rather than honor its stated policies. Many banks have faced similar claims.

Among the exhibits is an Aug. 21, 2007, email in which a Credit Suisse due diligence official referred to "some terrible decisions or missed calls, magnified by very bad feedback" in a bank business that handled underwriting and due diligence.

Another is an Nov. 22, 2006, email that MBIA said shows a bank official's concern about making "underwriting exceptions" that could result in "liability down the road when the loans go bad and people point out that we violated our own guidelines.

"The fulfillment process is a joke," the email said. "I hate to say it but I think we're either all in as a mortgage company or out completely at this point."


ThroxxOfVron's picture

Many many tickee; no laundry.

NoDebt's picture

There were versions of CDSs as far back as the 1920s in the US (probably other examples elsewhere in the world even before that).  Derivatives contracts, ditto.

Don't ever think that anything in the world of financialization is new.  It's all recycled bullshit with fresh paint slapped on it from decades ago, if not centuries.

Seer's picture

Yes, it's a disease that just waits for its time to attack.

Four chan's picture

how do you say Idlewild in chinese?

NoDebt's picture


You did leave yourself wide open for that.

kaiserhoff's picture


Nope, that's Nipponese.  Ask Wild Bill.  He'll know.

logicalman's picture

This is what happens when 'full faith and trust' turns out to be worth the paper it's printed on.

OceanX's picture

"China's roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels"

Are these stockpiles of real commodities or just reams of paper?

knukles's picture

... then I'm sure the Fed will give you back your 300 tons of gold ...

Seer's picture

Sure, given a long enough time period: abiotic gold!  I'm sure that when the empire rises again that it'll be able to expedite the shipments...

NOZZLE's picture

Now you know how a nation of people that invented gun powder, advanced ceramics and some other useful shit but never figured out what to with those first creations went from eating fish heads and rice and living on straw mats to what appeared to be a nation of vast wealth with their ugly ass wives buying $50,000 purses at Needless Markup like they were 5 and Dime coin purses.

Seer's picture

Broad brush.

There's like 1.4 billion Chinese.  Only a VERY small fraction has anything resembling "weath" (and that might depend on what's behind warehouse door number...).

NOZZLE's picture

You can't ignore the fact that there were never the same number of Americans dropping $50, 000 on a purse at Hermes in Paris in the halcyon days of America's industrial age.

Seer's picture

And those "halcyon days" were when?

Goldilocks's picture

Bluto's Big Speech - Animal House (9/10) Movie CLIP (1978) HD (3:15)

Animal House (10/10) Movie CLIP - Enter the Deathmobile (1978) HD (3:29)

RaceToTheBottom's picture

Interesting that they are presenting the western banksters as the knowledgible ones here...

They probably learned the "Warehouse transit Where's Waldo" game from WS Banksters who have perfected the game in the US and presented it to them as an easy profit center...

It allows the US Banksters to pretend that they have more assets than they really have by a considerabe amount...

83_vf_1100_c's picture

The Chinese don't tend to send fraudsters to posh rich people's prison as is done in the West. Lots of folks are gonna be standing in front of a firing squad before this plays out.