Fake inventories sold: Rogue aluminum trader gets life in jail after $1 billion fraud

A Chinese aluminum trader involved in a metal inventory scam that caused more than $1 billion in losses has been sentenced to life in prison by a court in the eastern province of Zhejiang.

Chen Xi, who controlled several trading houses and warehousing firms, was detained in June 2022 over his role in a high-profile over-pledging scheme, after lenders found metal they had financed did not exist.

The court ruling, seen by Bloomberg, named him as the mastermind, and also ordered personal property to be confiscated by the government.

One of a series of high-profile metal fraud scandals to shake the industry in recent years, Chen’s case involved tens of thousands of aluminum ingots, dozens of state-owned companies, private traders and four major warehouses in China.

It was among the country’s most serious, harking back to the vast loan fraud around metals stockpiles in Qingdao, just over a decade ago.

Chen, together with colleagues and several warehouse managers, is accused of duplicating inventory receipts to support fake storage records and sell aluminum stockpiles that did not exist, the court said in its ruling. The sales deals were linked to so-called repurchase agreements, or “repos,” which include terms to buy the inventories back after agreed time, meaning the metal is used as collateral to create short-term cash flow for the seller.

Between the end of 2017 and May 2022, Chen and those working with him obtained 7.6 billion yuan ($1.1 billion at May 2022 rates) in funds and more than 2,000 tonnes of aluminum ingots by selling fake inventories to more than 40 companies, the court said, causing a combined loss of 6.8 billion yuan.

The money was used to fix trading losses, invest in speculative futures trades and support a lavish lifestyle, the ruling added.

The court said Chen offered companies annualised returns of 7 per cent to 14 per cent, as well as prepaid guarantees equivalent to 15 per cent of the total transaction value, before buying the same cargoes back. 

Chen’s lawyers did not reply to messages seeking comment. Bloomberg News was not able to reach Chen, once a high-profile figure among eastern China’s physical traders. The court documents did not detail whether Chen had appealed the ruling.

China’s commodities financing has long been opaque, but in the past three years authorities have cracked down on transactions they view as offering little economic benefit. That probe, which has targeted physical transactions being used to obtain cheap financing or government subsidies, was intensified in 2023 and ultimately resulted in Beijing banning state-owned giants from some trades. 

Before that, commodities-linked trades were widely used by some state-owned companies, with access to inexpensive credit from government-run banks, to boost revenues. The gambit indirectly provided liquidity for thousands of smaller local traders struggling with thin profit margins in a competitive market.

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