Apparently in China, it’s not just gold, silver, and segregated client funds that vaporize in bankruptcies.
Reuters reports today that Chinese banks looking to seize collateralized steel have something in common with MF Global customers- their assets have been rehypothecated, and further- in many cases, the actual physical steel simply does not, and likely never did, exist:
Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.
The Chinese appear to be learning from the West. Rather than simply rehypothecate physical assets ad-infinitum as has been revealed is common practice among Western banks, the Chinese are rehypothecating assets that never even existed in the first place!
The Reuters report reveals that not only are lenders discovering that steel pledged as collateral has been rehypothecated, but that in many cases it never even existed!!
As defaults have risen in the world’s largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.
Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world’s steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.
‘What we have seen so far is just the tip of the iceberg,’ said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. ‘The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry.’
To sum up the current global financial landscape,
If you don’t hold it, you don’t own it!!