Source: Zero Hedge
Back in 2014, a scandal erupted when media reports confirmed what many had previously speculated about China’s banking system: namely that much of China’s staggering loan issuance had been built (literally) upon air and that billions (or trillions) in loan collateral had been “rehypothecated” between two, three or many more debtors – or never even existed – forcing banks to accept that they would never recover much if any of the pledged collateral – in most cases various commodities – if the economy were to suffer a hard-landing resulting in mass defaults. The most famous example involved collateral fraud at China’s 3rd largest port, Qingdao, where numerous borrowers were found to have “pledged” the same collateral of steel and copper to obtain funding from various banks.
For those unfamiliar there is an extensive selection of stories covering the topic, which peaked three years ago, and then quietly faded away as China did everything in its power to deflect attention from what some have said is the biggest threat facing its economy: a giant hole . Below we link to some of our more comprehensive articles on the topic:
- China’s “Evaporated” Collateral Scandal Spreads To Second Port
- What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?
- China Faces “Vicious Circle” As Commodity Collateral Collapses
- China Scrambling After “Discovering” Thousands Of Tons Of Rehypothecated Copper, Aluminum Missing
- Copper Plunges Most In 3 Months As “Rehypothecation Evaporation” Concerns Grow
- Western Banks Scramble As China’s “Rehypothecation Evaporation” Goes Global
- BIS Warns About Rehypothecation Threats
- How China’s Commodity-Financing Bubble Becomes Globally Contagious
- China’s Collateral Rehypothecation Fraud Is Systemic
To be sure, the story briefly resurfaced last month, when we reported that “Some Chinese Banks Suspend “Interbank Business” As Regulator Demands That Collateral “Actually Exists”, however it then quickly fizzled again, for two reasons: i) China watchers assumed that Beijing no longer had a “collateral problem” which had been somehow fixed after all the noise rehypothecation stories from in 2014, and ii) China now seemingly has even bigger problems on its hands, such as finding the right balance between maintaining the latest housing bubble, keeping capital outflows in check and its currency stable at a time when China’s debt (all 300% of GDP) was downgraded by Moody’s for the first time in 28 years, while its gargantuan shadow debt powder keg is one big red headline away from a $9 trillion shadow bank run.
And while the latter is certainly accurate, the former couldn’t possibly be further from the truth.
Read More Here: Reuters Goes To China, Discovers “Ghost Collateral” | Zero Hedge