2014-08-04

Prepare For Clogged Chinese Courts

Chinese courts are going to be clogged for years thanks to recent fraud cases and this is only the beginning.

After China port fraud probe, messy legal fight chills metal trade
As global banks and trading houses fire off lawsuits over their estimated $900 million exposure to a suspected metal financing fraud in China, the tangled legal battle to recoup losses is set to drag on for years and hinder a swift recovery in metal trade.

Earlier this year, there were reports of the steel trading fraud cases which emerged well over a year ago, but only started clogging the courts in 2014.

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

The fraud in Qingdao will likely develop into a similar mess. The credit guarantee bankruptcies are as bad in terms of the number of counter parties. Should the real estate market weaken enough to push more developers into bankruptcy or default, the courts will be busy for the rest of the decade.

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