When The Bubble Bursts: Copper Financing Used to Buy Real Estate; Economic Slowdown Is Exposing Bad Debts

China's credit problems are all connected. Rehypothecated copper in Qingdao's port was used to obtain multiple loans from multiple banks, with the loan proceeds invested in the real estate market. In the case of steel traders, much of the money went into real estate and even winery investments. When prices were rising, the steel traders would use loans to hoard steel. When prices started to weaken, they used loans to speculate in real estate and other areas. A lot of money even flowed overseas through letters of credit, in other cases it was was used in high risk and high interest rate investments.

With the real estate market cooling and sales of construction materials and furniture collapsing, the capital chain is broken. Receivables are rising because "If you don't pay me and I pay others, aren't I just a sucker?" The capital invested by the rehypothecators is trapped in these cooling and contracting sectors as receivables turnover declines.

There is increasing discussion of fleeing debtors. Deeply in debt and having defrauded banks, some debtors may decide to hit the road rather than face the music. Or the silence, since the game of musical chairs is over. Already in Zhejiang and the Pearl River delta there are many cases of debtors fleeing, the cases typically involve steel, copper and aluminum traders investing bank loans into the real estate market.

Finally, many industries are being hit by the slowdown, such as electronic components and ceramics. In Foshan last year, some ceramics factories delayed payments to suppliers for 3 to 4 months. Now it is 6 months or longer, and in some cases suppliers haven't been paid for 12 months.

This is the textbook case of a credit bubble bursting. The underlying businesses are not unsound. Due to high interest rates and short maturities though, as soon as the boom slows, turnover slows and the cash flow needed to pay back the debt is unavailable. Industries completely unrelated are now tied together due to cross industry loans (with real estate the main terminus for high risk credit). What would otherwise be a cyclical slowdown in the real estate sector is impacting everything from copper traders to fireworks factories, and threatening to bankrupt firms whose underlying business is not failing. All that was needed was a slowdown in the growth rate.

大宗商品贸易商“深套”房地产 违约“跑路”风险隐现

Whether it is a result of what form the loan defaults, it seems inseparable from behind real estate.

After the Dragon Boat Festival, Qingdao Port commodities trader "Piandai" incident became public. According to the 21st Century Business Herald reporter was informed from a number of people in the industry, "Finance copper" traders who "run away" problems may be just the time.

The reason is that, whatever is done to repeat the pledge of warehouse receipts steel trading business, or do the "financing of copper," the copper trading business, most of the funds received from the banks to invest in the real estate market or the surrounding areas, in leveraging the highly leveraged , the lower the real estate market will greatly increase their investment risk.

Huarong Securities researcher Cao Xuefeng said that in the case of steel trade, a lot of real estate loans inflows, wine investment is an important cause of funding strand breaks. And because the goods in and out frequently, it is difficult to ensure that prices, specifications, quality and pledge contract stipulated exactly the same, but also the effectiveness of the pledge may be weakened.

In addition, the credit facility has even been used for "stealing" foreign capital, which is the maturity model commodity trade circles.

As the real estate slowdown faster than expected, the flow of the real estate "loans" being stuck process. It is understood that real estate-related expenses such as building materials sales fell year on year growth of nearly 25 percent from December last year to 12%, furniture sales year on year growth fell from 20% in December last year to 11.8%.

On the one hand traders obtain bank funds through a variety of means for the real estate, loan sharking high risk investment, investment results damaged; hand is sluggish sales, business difficulties, cash flow tight. "Foot" has become to get out of the policy of these traders.

The industry believes that, with the continued decline in the real estate market, bank loans to customers "on foot" events are likely to continue to expand, and is likely to spread to other areas.

Similar to Jiangsu and Zhejiang provinces, the PRD has a lot of "foot" of steel, copper, aluminum and other commodity traders, and most are involved in the real estate market investments.

Shunde Lecong steel market, according to a steel trading company responsible person, "foot" of a few local steel trade, they mostly mortgage, pledge of warehouse receipts, guarantee companies and corporate guarantees, and other ways to get UNPROFOR from the bank loans, the loan-to-capital is much higher than the normal operating funds required.

"Before loans are generally just to hoard steel, steel intent to be sold to make a killing when prices now bleak steel market, traders took loans to invest in real estate, to put other investments, such as usury." The official said.

In addition to commodities traders direct loans to banks, "foot" crowd also spread to the downstream supply chain. During the investigation, reporters found that due to the existence of the Pearl River Delta region and the real estate market in many related industries, some of the past only focus their business "sub-merchant", also appeared phenomenon loan defaults.

Foshan is a typical, there are many small and medium sized gathering of electronic components factory and ceramic manufacturers, their products and the real estate market closely, but compared with large enterprises, local manufacturers of electronic components smaller, generally only one or two Large home appliances business fixed supply, when the downstream manufacturers of home appliances sales slump, electronic components factory will face great pressure on the operation.

According to informed sources, due to reduced orders, unable to maintain normal cash flow, there are already a number of electronic components factory owner, select "run away." "These bosses are mostly open field to the plant, a stay away clean, and could not find them." The source said.

Ceramic manufacturers affected by the real estate market even more. According to reporter investigation, last Foshan ceramics factory raw material procurement funds are generally delivered 3-4 months delay, but now many ceramic production plants are over this period is extended to six months, some manufacturers have even 12 months are all raw material procurement funds not paid.