Metals traders lose at least one billion yuan as ‘Hat’ flees China

[SINGAPORE] Chinese metals traders have racked up losses totalling at least one billion yuan (S$183 million) after one of their counterparties fled the country, leaving deals unfinished, alarming top regulators worried about hidden financial risks, according to sources familiar with the matter.

At the heart of the crisis is a trading network facilitated by Xu Maohua, a metals dealer nicknamed The Hat, said the sources, including some who worked with or did business with him and are directly affected by the losses. State-backed SDIC Commodities was the highest-profile participant, they added, asking not to be named given the sensitivity of the matter.

Xu owed money to the company for shipments of copper and other metals, and it in turn owed money to its suppliers, the sources said. The fallout includes one lawsuit against SDIC Commodities filed for over 200 million yuan in damages and bills that the plaintiff claims have gone unpaid, according to an exchange filing from a company involved. The firm has not publicly responded.

The Chinese government has taken a dim view in recent years of companies it believes are engaging in any risky commercial practices that threaten the orderly functioning of markets. That’s especially true of the state-owned enterprises (SOEs) it directly supervises, which have been warned against straying outside their core businesses. Commodities firms have drawn scrutiny after a number of scandals in the often opaque sector.

Regulators have been particularly bothered by so-called circular trading, where companies buy and sell the same asset among themselves to create the illusion that revenue has been generated. It’s likely that SDIC and other firms lost money after Xu vanished because his exit effectively broke a chain that had lasted for years, said the sources, some of whom were counterparties that were directly impacted by his departure.

Xu did not respond to requests for comment sent through his social media accounts, nor through close business contacts still in China. SDIC Commodities is a trading unit of State Development & Investment, a government conglomerate with annual sales of nearly 200 billion yuan. The parent, reached by telephone, declined to comment on behalf of its subsidiary.

While there’s no official total of the losses incurred by the company and other traders and banks in Xu’s orbit, a tally of estimates from people directly involved in the deals suggests it could be at least one billion yuan. Some of the sources said they believe the sum may be far larger, based on the scale of trades they’ve been involved in or observed over a period of years.

Guangdong Prolto Supply Chain Management, a trader in Shenzhen, has sued SDIC for 219 million yuan after the company failed to fully pay for shipments of metal concentrate, according to an exchange filing in December. Prolto declined to comment on the case.

A court in Tianjin has separately seized 3,150 tonnes of refined copper held by the SDIC unit in storage in Wuxi, Jiangsu province, at the behest of a Chinese policy bank, according to sources with knowledge of the case and court documents viewed by Bloomberg. The copper has been frozen to preserve the trader’s assets in case of litigation, the sources said.

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Fictitious metal

Xu, whose given name sounds like “hat” in Mandarin, and who uses the alias as his WeChat moniker, was central to a network that helped the SDIC subsidiary boost sales, according to six sources who previously worked with him. It did so, they allege, via irregular deals that skirted government rules, which limit state firms to trading raw materials necessary to their core operations. SDIC Commodities’ parent runs power plants in China and is involved in President Xi Jinping’s Belt and Road initiative to build out infrastructure across the globe.

From his base in Foshan in Guangdong province, Xu was a middleman operating a number of companies that bought metals from smelters or other traders, and then resold the shipments to SOEs, according to his associates. Part of the deal was a commitment to repurchase the cargoes at a later date.

Xu was able to realise cash almost immediately on the trades by selling the invoices from his SOE customers, the sources said. Firms that offer factoring services, including some banks, would buy the invoices at a discount before the deliveries of metal were made.

The alleged scheme included metals that were not actually his to sell, while many of the companies involved in the transactions were owned by Xu himself, according to several sources who did business with him.

Chinese metals markets have seen more than their fair share of scandal in recent years, from the bankruptcy of the country’s top copper importer to fictitious stockpiles of aluminium that caused more than US$1 billion of losses. In that case, a trader was sentenced to life in prison last year.

In Xu’s case, some of the sources who know him and have traded with him said his finances may have unravelled after a separate bet that the silver market would fall went terribly wrong, pushing him to flee the country. Silver prices have doubled over the past couple of months.

Xu is a well-known figure in Chinese metals markets. Born in 1972 in Baiyin, a city in the northwestern province of Gansu, he earned his bachelor’s degree from North China University of Technology in Beijing. He began his career trading recycled metals in Guangdong, before expanding into refined metals and concentrates ranging from copper and zinc to indium, according to sources who know him. They declined to be named, given the sensitivity of the issue.

The losses left in Xu’s wake have caught the attention of China’s state-owned assets watchdog, which in recent weeks has ordered major commodities trading companies in its purview to review their operations and eliminate superfluous activities used to boost revenues, according to sources familiar with the matter. Any pullback from SOEs could sharply reduce liquidity, adding to pressure on smaller players, they said.

The State-Owned Assets Supervision and Administration Commission (Sasac) did not respond to a phone call and an e-mail seeking comment.

Sasac first imposed its restrictions in 2023, triggered in part by a debt crisis at a state-owned timber company, but compliance has been patchy. A slowing economy has made it particularly tempting for state firms to find other sources of revenue, the sources said. BLOOMBERG