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China tightening steel trade financing controls

Keywords: Tags  steel trade financing, China steel, Shanghai Steel Service Association, warehousing scandals, steel trading

SHANGHAI — Chinese authorities are striving to clean up domestic steel trading in the wake of last year’s warehousing scandals.

The Shanghai government is wary of a repeat of last year’s shadow financing affair and is trying to make collateralized lending against steel products more visible.

A recent report in a semiofficial newspaper suggested that city authorities plan to set up an electronic platform to track warehouse warrants and loans in the steel sector.

"(The electronic platform) is good for the long-term development of the steel market since it will help avoid similar defaults by strengthening the banking system," a trader in Shanghai told AMM sister publication Steel First.

With a system to track and verify warehouse receipts for steel, copper and other commodities, traders won’t be able to use fake receipts or pledge the same stocks several times to different lenders.

The Shanghai Steel Service Association—a form of chamber of commerce for the steel business in the city—also has suggested other ways to mitigate financial risks in steel. There should be a "trader list" containing the credit records of steel traders, association chairman Zhou Huarui said, to supply information and references to banks so they could more easily identify companies applying for loans and avoid giving funding to speculators, thus providing more flexible lending conditions.

Suzhou, a city neighboring Shanghai, has already implemented such a practice.

But some market players warn that this could starve sound companies of funds. Some banks, scared by last year’s scandal, have already stopped giving loans to steel traders.

To balance the development of the steel market and traders, local steel associations have suggested setting up cooperative "risk alert mechanisms."

A version of this article was first published by AMM sister publication Steel First.

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