China’s biggest bank is being sued by Dutch lender ING over losses it suffered in a batch of copper deals in a case that highlights the risks of doing a disservice to the scandal-ridden world of commodities trading.
Amsterdam-based ING is seeking $170 million in damages from Industrial and Commercial Bank of Chinaallegedly breaching the terms of the contract by issuing export documents for copper transactions without collecting payment, according to a Hong Kong court filing seen by the Financial Times.
This resulted in ING record losses on metals sold to China’s largest copper trader, Maike Metals International, by Triway International, a Hong Kong-based wholly owned subsidiary of Maike. Maike did business with ICBC and Triway with ING, but the latter merchant did not receive payment and ING had funded his transactions, according to a person familiar with the Dutch lender.
ICBC’s alleged breach of contract happened just before Maike declared a liquidity crisis last September, when it said it would have to sell assets and stakes as it was cash-strapped.
The commodities trader, which handled a quarter of the country’s refined copper imports but is now being restructured, was caught off guard after raising short-term funding, using its copper stocks as collateral, to invest in the Chinese real estate market. Those investments have turned sour amid rigid zero-Covid policies and Beijing’s crackdown on the sector.
Maike’s financial troubles have added to worries about the metals trading sector, which has been rocked by a series of frauds. Glencore and other global trading groups stopped supplying Chinese metals trader Huludao Ruisheng last year after $500 million worth of copper went missing. Singapore-based trader Trafigura said in January it was the victim of a $577 million nickel fraud, while bags of stones were discovered instead of nickel in a London Metal Exchange warehouse last month.
ICBC is Maike’s main bank, headquartered in Xi’an, the capital of the northwestern province of Shaanxi. ICBC fired the head of its main Xi’an branch last October over problems with its international trade finance business, according to a report by Chinese financial newspaper Caixin. Maike was the branch’s biggest customer, the report noted.
The lawsuit exposes China’s largest state-owned bank by assets to reputational risk and the China Banking and Insurance Regulatory Commission, the country’s top banking supervisor, questioned ING on the case, according to a person familiar with the matter.
Western commodity traders and financiers believe the outcome of the lawsuit will help determine confidence levels around continued commodity financing in China. Western banks have gradually withdrawn from a type of lending they once dominated in mainland China after suffering losses and being exposed to fraud.
Among these, the largest US metals trading bank, JPMorgan Chase, significantly reduced its exposure to Asian clients after acting as a counterparty to China’s largest stainless steel producer Tsingshan, whose large short position was at the heart of suspension of nickel trading on the LME a little over a year ago.
Colin Hamilton, managing director of commodities research at BMO Capital Markets, said banks’ worries in recent years had been alleviated somewhat by confidence in the arbitration system provided by the courts.
“This [case] could escalate governance issues,” he said. “Furthermore, we might even see a form of ‘governance bonus’ applied [by banks] to exchange funding with China to cover legal and insurance costs.
The Hong Kong High Court held a hearing in the case on April 12.
ING and Maike declined to comment on the matter, as did law firms Reed Smith and King & Wood Mallesons, which represent ING and ICBC respectively. ICBC and CBIRC did not immediately respond to requests for comment.
Additional reporting by Chan Ho-him in Hong Kong
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