Qingdao Port

Qingdao Port

Insolvencies are to increase in China, Hong Kong and Taiwan this year, with traders facing greater challenges than ever in accessing finance.

Euler Hermes, the Paris-based trade credit insurance provider, warned that it expects the number of Chinese companies filing for bankruptcy to increase by 5% in 2015, with a similar rise predicted in Hong Kong.

“The credit conditions are already tight, especially for any projects financed by non-bank institutions. The regulatory bias is likely to be towards tightening further to contain financing risk,” the company’s senior economist for Asia, Mahamoud Islam, tells GTR.

The report cites the case of Kaisa Group Holdings, a Chinese property developer, which defaulted on an HSBC loan early in 2015. But the rising insolvencies will not be restricted to the real estate sector, and are likely to grow in the trade and commodities space too.

With the Chinese central bank squeezing liquidity in the market in an effort to clampdown on the shadow banking system, trade finance has been harder to come by for many Chinese companies. This in turn has resulted in later payments, with buyers requesting credit from exporters.

Simultaneously, international banks have been re-evaluating their lending habits in the wake of the Qingdao commodity fraud from last year, when Chinese authorities announced that they were investigating a private metals trading company for using fake warehouse receipts in order to secure multiple loans using single cargoes of copper and aluminium stored at the port as collateral.

Numerous international banks were exposed to the fraud, losing hundreds of millions of dollars as a result, and have since tightened their due diligence and risk management practices in the region. While sources say most banks have remained in the pre-payment collateral lending game, the fact that they have had a squeeze on compliance means that fewer deals are getting done and that those that are done are, by default, taking longer to complete.

All of these factors result in companies struggling to get the finance they require to trade, and in the worst-case scenarios, going under.

However, GTR understands that there are new players hoping to gain a foothold in the market, where some of the traditional players have vacated. There has been a proliferation of new entrants to the commodity finance market in recent months, providing loans to subsidiaries of Chinese companies based offshore in Hong Kong.

The finance is funnelled onshore in the form of pre-payment, allowing commodities companies to pay for shipments of stock. In the case of funds, they price their lending several percentage points higher than traditional banks, although the deals are generally less sophisticated in nature.

Players increasing their involvement include offshore subsidiaries of Chinese banks, based in Hong Kong and, GTR understands, one significant US bank which previously had no involvement in the collateral trade.

“We’ve had one US bank come in saying they’re planning to start pre-payment financing, the market is not closed. Some banks are going out, but others – all the PRC banks, funds are really coming in and others that you might immediately expect are coming in,” says Philip Gilligan, finance and insolvency partner at Hong Kong law firm Deacons.

The involvement of funds in the commodity pre-payment space is, says Gilligan, relatively new and so it’s unclear just how much due diligence is taking place. However, in the deals he has seen first-hand, the documentation has been satisfactory.

Other banks which do not wish to vacate the lucrative space are attempting to tighten up their warehouse management arrangements, in order to avoid the phantom cargo scenario we saw in Qingdao. One unnamed bank has even set up its own chain of warehouses in a bid to take complete control of the situation.

Meanwhile, Euler Hermes commercial director for Asia Pacific Anil Berry says that the rising number of insolvencies could also alter the manner in which trade is conducted in the region, which could present a whole new raft of risks.

Berry explains: “Essentially, Chinese buyers are increasingly turning to local exporters for more credit. They are also insisting on open account terms whereas traditionally they were happy to pay on letters of credit or even on advance payment terms.”

Written for GTR

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