Foreign banks are still in the dark about any possible losses related to the allegedly fraudulent use of metals as collateral for loans in China.
At least a half dozen Western lenders, including Citigroup Inc. +0.48% and Standard Chartered STAN.LN +0.65% PLC, provided loans to trading firms that were backed by metals such as copper and aluminum stored in Qingdao, on China's eastern seaboard.
Local authorities in Qingdao, and Penglai, another port city also in Shandong province, have been investigating whether the metals have been reused several times as collateral by traders and companies seeking funding. Already, a major state-owned enterprise,Citic Resources Holdings Ltd. 1205.HK -1.55% , said some metals that it has stored at the Qingdao port can't be located.
But because banks can't get access to the storage facilities at Dagang in Qingdao and Penglai port where the probes are under way, the scale of any possible losses can't be tallied up.
"I have the impression that a lot of people do not know where it stands, which makes me nervous," said one executive at a Western bank.
There is some indication that the probes may no longer be local. In recent days, one of the banks that has been seeking to access the storage facility at Penglai has been informed that the probe now include authorities from Beijing, according to a person familiar with the matter.
The Hong Kong Monetary Authority, or HKMA, said it is keeping a close eye on developments amid concerns that banks in the city have become dangerously exposed to China's economy through excessive lending.
"The HKMA has been closely monitoring the credit exposure, including those incurred from the business of commodity finance, of the banking sector," a spokeswoman said in an emailed response to queries Friday. "Authorized institutions are expected to maintain sufficiently robust system of controls to manage the specific risks that they are facing," an HKMA spokeswoman said.
Banks in Hong Kong are especially exposed to lending to Chinese clients, who face higher interest rates at home. But data from the Hong Kong Monetary Authority, covering banks including the Hong Kong units of HSBC Holdings HSBA.LN +0.96% PLC and Standard Chartered, show that trade finance accounted for just 8.6% of total loans at the end of April. Brokerage CLSA reckons that only a small portion of that, or about 10%, is related to the metals trade in China.
Executives from the foreign banks involved in the probe say Decheng Mining, a Qingdao-based metals trader, and its parent Dezheng Resources are the focus of an official probe into allegations that entities linked to these two companies illegally pledged the same stockpiles of commodities for multiple loans. Qingdao port authorities have confirmed that there is a government probe but haven't identified any companies being investigated. The government hasn't officially commented on the investigation. Attempts to reach executives at Decheng haven't been successful.