Steel Trade Lawsuits Explode; Banks' Unceasing Nightmare; Defendants Flee

The situation with steel company debt continues to deteriorate. Last year there were a total of 2500 lawsuits at the relevant court in Pudong, Shanghai; in the first quarter of 2013 there were 1051 lawsuits. Last year the cases amounted to ￥19 billion, this year they are already ￥11.4 billion, in other words the average case in 2013 was about ￥7.6 million, but this year it is up to ￥10.8 million, an increase of 40%. The situation is expected to continue worsening into next year, with concern that this is still the tip of the iceberg.

According to an insider at the court, this year's cases have some new characteristics. The first is the concentrated debt, such as the case of Xiao Jiashou, the Shanghai Steel Trading King, which involved seizing assets of ￥460 million. Second are larger and larger cases in general, with cases above ￥10 million in debt more frequent. Third, the service rate is down (service of process) because the defendants have fled.

Last year the assets in these cases were better, and people were willing to mediate. This year asset quality has deteriorated and so defendants don't care.

The case load is putting pressure on the court system in Pudong. The work load is heavy for each case: there's an average of 15 defendants. There's the lending contract, loan certificate, guarantee contract, mortgage contract, warehouse agreement, plus third parties involved in the steel trade. (And based on the evidence below, many of the guarantor firms themselves may be other steel trading firms also in default. This is the interconnected finance situation seen also in Xiaoshan and in fact all over China.) One case has 20 boxes of files. More cases come as parties file claims with credit insurance companies, who then come to the court seeking compensation.

In 2013, banks had lent about ￥200 billion to the steel trading industry. About ￥70 billion of it is in default, another big chunk of it is not due until next year, but is expected to default.

Many banks lent to dealers who have relationships with the steel mills. If the dealer can't sell the product, many mills agree to buy it back, thus the banks are going after the mills. This spreads the credit risk from the dealers right to the top of the steel industry. Already there are rumors of private steel mills going bankrupt......

There's yet more. A lot of steel trading firms did not use loans for steel trading. They used 10-20% of proceeds to make high interest loans, another big chunk was used to speculate in real estate and land. This diversion of loan proceeds is common, in fact these steel trading firms have become empty shells, simply a financing platform. One business is steel trading, the other is finance.

Shanghai has more than 80 guarantor companies and nearly 40% of them were opened by Zhouning, Fujian steel trading companies (aforementioned Xiao Jiaoshou is from Zhouning). Here's some background on how things were working before the bust:

At the height of the credit fest, a steel trader simply needed to present the banks with an ID card from Zhouning to get start-up capital of Rmb5 million ($815,000), according to MoneyWeek. Typically the bigger Zhouning businessmen would guarantee the activities of more junior entrepreneurs from their home county.

This interlocking web of financial commitments was risky, but banks were happy as long as they were generating annual interest payments of Rmb25 billion on the back of Rmb200 billion of outstanding loans to steel traders, according to Shanghai Banking Regulatory Bureau figures.

But lending standards became increasingly slack. As one market participant tells MoneyWeek, “Banking officials didn’t bother checking steel traders’ inventories, or conduct onsite checks for loans, side-stepping risk management mechanisms.”

Soon Zhouning’s steel barons were relying on increasing amounts of leverage to keep the financing flowing. One report suggested that a single tonne of steel had been used 30 times to secure loans from different banks.

Where was this money going? Much of it was hunting for quick returns in the property market or heading into high-return loans in the shadow banking industry.

2014 is the year the steel trade debt crisis could explode. This industry is not like others: loss rates are very high. If these debts hit the banks' balance sheets, it will push up their NPLs. So banks have been taking lots of measures to keep these NPLs from showing up (see Tricks For Hiding NPLs. According to listed banks' annual reports, in the first half of 2013, overdue debts increased ￥116.7 billion, but NPLs only increased ￥38.9 billion. In 2009, bad debts exceeded overdue loans by ￥0.9 billion, now overdue loans exceed bad debts by ￥210.3 billion. This is because banks have become less strict in their classification of bad debt.

Google translated article:
钢贸诉讼集中爆发 银行坏账噩梦不断

The bank is expected to dispose of the steel trade has come to an end category of bad debt continues to deteriorate, the steel trade loans holistic outbreak cases appear not previously.

China Securities Journal reporter learned from the Shanghai Pudong New District Court last year, the hospital accepted all year loan steel trade dispute 2500, while the first quarter of this year has reached 1,051. Last year, the steel trade involving Shanghai Pudong area banks 190 billion in the first quarter of this year, the steel trade-related loans reached 11.4 billion yuan. Steel trade loans continued to show a large-scale outbreak of cases the situation, and this situation probably will continue into next year.

Since the lawsuit joint-stock banks in Shanghai almost all concentrated in the Pudong New District Court, the above data has great representation. It is understood that the steel trade more litigation livelihood, CITIC, peace, Everbright, ICBC and other banks. The industry is worried that the above situation is probably just bad debts "tip of the iceberg."

Litigation insurance companies concentrated outbreak passive involvement

Pudong New District Court Chambers financial year are almost all human flutter in the trial of such cases in the steel trade.

Person in charge of the hospital, the steel trade cases appeared several new features this year. The first is the more obvious characteristics of concentrated outbreak - showing a case of a concentrated outbreak of the steel market, and last year there is no such. Like "Shanghai Steel Trade King," said the Shanghai Songjiang Steel City chairman Xiao Shou equity assets are seized 466 million yuan case, Xiao Shou own borrowing is not much, but he, as chairman of the city for the Steel City Steel numerous steel Trade provide a lot of security.

Second, is the subject of growing. Last year the amount of steel trade category of cases was 190 million in the first quarter of this year reached 11.4 billion yuan, many thousand million cases.

The third year, the rate of delivery of steel trade cases less. That is, the defendant "foot" is more serious.

"Last year, the steel trade cases involving assets seems a little better, there are people willing to mediate this year felt the guarantor has no ability to provide guarantees, so no matter altogether." The person in charge.

Steel trade categories of cases heard, the court has allowed the Pudong New Area felt the heavy pressure.

The trial of such cases particularly large workload. Basically, each case has about 15 defendants, which relates to the borrower, guarantor, mortgagor, steel trade enterprises, and some have storage company, mixed with a lot of legal relations. Set of materials for each defendant, the defendant also involves a loan contract, loan documents, to ensure that contracts, mortgage contracts, contract warehousing supervision, as well as steel trading business and tripartite agreements ......

"Multi-defendant cases, the addition of material A clerk told me that we send a copy of the receipt on the back more than 100 A case has 20 cartons court hearing child ...... financial loan contract dispute involving mostly steel trade, the bank is also a priority disposal of steel trade; bank too late, we have no time, this year's focus is steel trade "relevant person in charge of Pudong New District Court told the China Securities Journal reporter.

Moreover, the steel trade this year, some lawsuits "deformed." Between the steel trade financing, when signing the contract of sale, to the insurance companies of credit insurance, credit insurance, apply for debtors, but the subject is relatively large, then the steel trading business did not receive the goods on the grounds to claim compensation. After the insurance company for compensation, on to the court proceedings, requiring recovery.

The risk of misappropriation of funds or spread to frequent chain

It is understood that in 2013 the bank loans involving steel trade up to more than 2000 billion, in part due to approximately 700 million, of which less interest has occurred, to prosecute the more than 190 billion yuan; another part is not due , is a dynamic figure, certainly there next year.

A Shanghai investment company responsible person, the industry's most worried about is the credit risk spread to other industries from steel trade.

Steel trade loans have a very "deadly" product called "vendor Silver", almost every bank has. Simple generalization is the bank for a loan large steel dealers based on sales. If you can not sell the steel, the steel mills commitment to repurchase. If the lender can not recover for the dealers, can be traced to the large steel mills upstream.

"It makes it easy for dealers to spread the risk to the upstream steel coupled with overcapacity in the steel industry, there have been rumors of a private steel mills into bankruptcy. Then will be more severe." A Shanghai investment company official told China Securities Journal reporters.

Year of the Horse at the beginning of the Shanghai region, "Steel Trade King" Xiao Shou banks have been seized assets. Subsequently, gold type Heavy Industries Ltd. of Guangdong, Shandong Iron and Steel Co., Ltd. Bo Kim also led to a credit crisis is not small. Large-scale private enterprises in Shanxi Haixin Iron and Steel, Shanghai, China Metallurgical Steel Group Co., Ltd., have also caught in the debt crisis.

In addition to the steel industry, private lending, real estate and other areas of high-risk areas are also risk conduction.

"Steel trade bank loans rarely true for the steel trade, 10-20% of their loans to civil usury;. Remaining there are a large part of the investment in real estate, land speculation." A Shanghai investment company responsible Introduction.

According to the Shanghai steel trade associations related parties, such misappropriation of funds in the steel trade and industry, the phenomenon is widespread, steel trade enterprises has actually become a shell of the financing platform. Zhou Ning person claiming two business does best, is a steel market, and the other is financial.

Shanghai has more than 80 companies have secured nearly 40 percent of Zhou Ning steel trading business open. The company is mainly engaged in lending guarantees, warranties, steel, secured. The majority of these funds is to guarantee the company's bank credit funds misappropriated. And a large number of steel trading business bankruptcy, frequent events such as foot and almost let private credit system crash. "Like the case of Wenzhou have occurred." Shanghai a security company sources said.

Fujian Zhou Ning in the country who has created more than 150 steel market, steel trade enterprises operating nearly 20,000. Zhou Ning steel trading business in the name of the construction steel market to the enclosure, all of a sudden is a few acres. After two or three years the appreciation of land, but the steel trading unsustainable As expected, the steel market is a matter of course to commercial real estate. Zhou Ning people through the store, the land value, resale large fortunes. Moreover, Zhou Ning steel trade in steel market as collateral for loans from local banks. After taking the money to do short-term loans, so lending, to other places to build the steel market, so scrolling.

With the sharp reduction in infrastructure investment over the steel market will gradually expose triggered the crisis.

Breaches or continuation of growth in non-performing loans

In fact, Suzhou, Wuxi and other cities with many steel market also appeared massive steel trade bank bad debts.

Lian Ping, chief economist at Bank said earlier that 2014 will be a risk of large-scale outbreak of steel trade of the year. The case of steel trade loans are very different from other industries, the loss rate is very high, if all exposure to short-term, non-performing assets of commercial banks rose sharply, the listed banks unacceptable. Therefore, the bank has taken various measures reflected in the NPL ratio should be said that there is a certain degree of retention, in 2013 and did not fully exposed, the situation may eventually lost in 2014 basically exposed.

Report from the listed banks in 2013, the first half of overdue loans grew 116.7 billion yuan over the same period increased by only 38.9 billion yuan of bad loans, overdue loans and non-performing loans difference between -9 billion by 2009 to 210.3 billion yuan to expand Overdue loan growth significantly higher than the non-performing loans. This difference reflects a certain degree of extension and restructuring of commercial bank loans overdue more conservative, but in the past the more stringent overdue loans identified as non-performing loans has been a change of policy, but if the overdue loans and non-performing loans between the gap in the future continue expand, then gradually identified as overdue loans bad enormous pressure.

Moreover, the risk of non-performing loans in 2013 traditional exposure-prone areas still obvious. In addition to the "two high and one left," the industry to specific industries such as the steel trade and export-oriented enterprises in eastern coastal areas of non-performing loans on behalf of small and medium enterprises are also growing rapidly. With further changes in some sectors (such as shipping) operating environment in the upstream industry chain of large companies began to be affected.

Lian Ping believes that a stable macroeconomic growth target of about 7.5% in the background, bad banking loans inertial growth trend could continue into the second half of 2014, the balance of non-performing loans still have a certain level of the annual increase in the rate of increase in non-performing loans 0.1-0.2% in the non-performing loan rate may increase to 1.1% -1.2% level. Overall, the number of potential risks while the possibility of the outbreak of asset quality deterioration is small, but if the GDP growth rate of nearly 7 percent, while commercial banks can not introduce effective policies to control the potential risks, do not rule out non-performing loan ratio increased to 1.3- 1.5% of the possibilities