Finbarr Bermingham reports from Beijing, where conference-goers braved arctic weather to discuss an equally bleak trade and commodities sector.


The world has become addicted to Chinese data. Every monthly or seasonal release draws headlines and analysis galore. And so it was appropriate that one stark figure dominated the early exchanges at the GTR China Trade and Export Finance conference in Beijing: -16°C. It’s rare for temperatures to reach such depths in the Chinese capital, but in a year in which the economy has lurched between extremes, the sideways-falling snow seemed somewhat fitting.

For those who live and work in Greater China, the economic troubles have not come as a surprise. “Anyone who’s done any work out here with China will have been able to tell you that it’s been screwed for years now,” said one commodities lawyer, and the mood on the ground was one of reluctant acceptance that the economy would not make a miraculous recovery. Instead the conversation was focused on how to keep things ticking over as the lights keep dimming on the world’s second-biggest trading nation.

There was the unusual event of a Chinese bank admitting culpability around poor compliance and regulatory controls. Other bankers accepted publicly that their financing of Chinese commodities had been reassessed. All in all there was a sense that after a period of denial, people are coming to terms with what doing trade finance in China now means, and how the market has changed.

The figures are blunt. In November, Chinese imports were down 8.7% compared to the previous year. They fell by 12.6% in October. In November, exports fell by 6.8%, up from the 5% lag reported in October. This was the fifth consecutive monthly decrease in exports, blamed largely on stagnant global demand.

In the face of a global slowdown – exports are forecast to fall 2% this year – China is looking to stimulate local demand and is expected to cut the interest rate, while moves are underway to further consolidate the metals sectors in a bid to cut production.

Speaking to GTR on the sidelines of the conference, Nicholas Kwan, director at the Hong Kong Trade and Development Council, gave his outlook for the coming year: “This is a long transition process which can take several years or decades. So don’t expect China to repeat its growth miracle of the past 30 years: anything above 7% should be celebrated. Anything below 5% or 6%: we need to be cautious. Even though we look for quality of growth, we expect a certain momentum to keep that quality growth.”

Regarding exports, Kwan said: “Exports are difficult. It’s nothing to do with China itself. The problem is a lack of demand. I expect that we may have a very difficult year for Chinese exports. They have to move up the ladder, away from cheap and low-cost. There is room to improve. If they can make it they can achieve some minor single-digit growth. More important is the import picture. If China were to succeed in this transformation from low to high end of the industrial ladder they need to import more. Not just luxury goods, but technology, more quality.”

It’s within this atmosphere of uncertainty that banks are becoming increasingly sceptical of and reluctant to lend to the commodities trade in China. Deal volumes have crashed, with banks attempting to stimulate interest in supply chain finance products in the region, amid plummeting profits in the traditional trade and commodity lines of business.
At the conference, commodity traders, bankers and lawyers all signalled that banks have been forced to re-evaluate their lending practices in China. While many banks have been scaling back on commodities lending globally, the situation is aggravated here, where a number of high-profile fraud and document-keeping scandals have eaten away at trust in the sector.

It’s led to consolidation in the market, where banks are focusing on their core business, leaving fewer willing to dabble in perceived higher-risk markets, and leaving producers and traders scrambling for the little finance available to them.

“All financial institutions are sceptical on commodities,” said Calvin Leung, head of trade, North East Asia at National Australia Bank. “There’s a lot of bad practice in the market.”
He added that the practice of using a single instance of commodity collateral to obtain multiple loans has also come under scrutiny. “Banks are getting more concerned about using the commodity to finance… If a bank wants to focus on commodity finance it requires another set of expertise. Some banks have got burnt and withdrawn from the market.”

By loosening the credit available to its local banking sector, the People’s Bank of China (PBOC) may be able to provide some relief here. But as shown around the world in the post-crisis quantitative easing spree, it’s often difficult to ensure that the capital finds its way to where it’s needed most.

“The problem is, with the economy not behaving well and weak demand, it’s difficult to push the credit. You can tighten it easily, but for a central bank it’s difficult to push. You could still see sectors suffering from oversupply or weakened demand. Even though they want credit they may not be able to get it. Banks are very cautious. Overall the credit environment should be relatively loose or looser. The main challenge is whether they can get the money to the right place,” Kwan said.


Qingdao ghost

More than a year on from the Qingdao metals fraud at the world’s seventh-largest port, the topic is still causing confusion and concern throughout the sector in China. It has slowed the pace and volume of transactions, but has forced banks to become more granular in their approach to China.

“In the past, Chinese banks didn’t care about fraud – just the paperwork,” admitted Zhang Zhaojie, head of trade service and financial institutions at the Agricultural Bank of China.
Now, the feeling is that banks are becoming more diligent in their approach, particularly to warehouse financing and repurchasing agreements (repos).

“I think the Qingdao scandal tells us we need to do more due diligence in terms of the local legal system. For example, on Qingdao the issue is the warehouse receipt. As we know in China a warehouse receipt is not the document title,” Yongmei Cai Evers, partner at Simmons & Simmons told GTR. (Watch the video interview here.)

The product of all this is the creation of a gap in the financing market. GTR reported throughout 2015 of the growing presence of hedge funds and private equity firms in the commodity finance space in China. Much of this financing is done on a cross-border basis out of Hong Kong.

“Metals and mining are in difficult financial predicaments. Banks don’t want to lend, and they can’t go to equity markets,” said John Reeve, director at Brisbane-based AgRee Commodities. “The private equity space is looking to dovetail into mining pre-payments.”

These firms are believed to be looking to make money through mining royalties or streaming – when a funder makes an agreement with a mining company to purchase all or part of their precious metals production at a low, fixed, predetermined price to which both parties agree. In some instances, the fund may take a 20 to 30% stake in the lifetime of a mine, providing a genuine alternative to a banking sector that’s conspicuous by its absence.