Chinese metals markets have been shaken after a key trading counterparty, Xu Maohua, suddenly fled the country. His disappearance left at least $144 million in losses, unfinished deals, and frozen metal stockpiles. Regulators have been alarmed, revealing hidden financial risks in the country’s commodities trading system.
A Sudden Disappearance Triggers Heavy Losses
Chinese metals traders report combined losses of at least 1 billion yuan after Xu Maohua, a central figure in multiple trading deals, left without fulfilling his obligations. These trades involved copper and other metals, many of which had been ongoing for years.
The collapse affected several firms, including the state-backed SDIC Commodities Co., part of State Development & Investment Corp., which purchased metals through Xu’s network and owed money to suppliers. When Xu vanished, payments were delayed or never arrived.
Legal action quickly followed. Guangdong Prolto Supply Chain Management Co. sued SDIC Commodities for 219 million yuan over unpaid shipments. In a separate case, a court in Tianjin froze 3,150 tons of refined copper stored by SDIC Commodities in Wuxi, Jiangsu province to protect assets during litigation.
Although the total losses are not officially confirmed, estimates from those involved suggest the damage could be far larger, reflecting the scale of trades over several years.
Circular Trading and Hidden Risk
At the heart of the problem was a trading network led by Xu Maohua, nicknamed “The Hat”, which relied on circular trading. This occurs when companies buy and sell the same goods repeatedly, creating the appearance of strong sales while generating little real value.
In Xu’s network, metals were sold and resold through companies he controlled, often with agreements to repurchase them later. This allowed quick access to cash, as invoices from buyers like SDIC Commodities were sold to banks and factoring firms at a discount, even before deliveries were made.
The system broke down when Xu’s finances collapsed, reportedly after a losing bet on silver prices. Once he fled, metals were undelivered, invoices went unpaid, and some cargoes were found to be non-existent or not owned by him.
Chinese regulators have long been concerned about circular trading because it hides debt, inflates revenue, and increases financial risk. The involvement of state-owned companies in this network has intensified those concerns.
Scrutiny of State-Owned Trading Activities
The losses have drawn attention from the State-Owned Assets Supervision and Administration Commission (SASAC). Major commodities trading firms under its supervision were ordered to review operations and stop unnecessary trading activities aimed only at boosting revenue.
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State-owned enterprises (SOEs) are limited to trading materials related to their core businesses. While rules were tightened in 2023 following other corporate debt crises, enforcement has been uneven, and some SOEs continued risky trading practices.
A slowing economy has increased the pressure for alternative revenue sources. Complex deals, like those orchestrated by Xu, may appear profitable but carry hidden dangers.
This is not the first scandal in China’s metals markets. Previous incidents involving fake stockpiles and false documents led to over $1 billion in losses, highlighting the sector’s fragility.
As lawsuits continue and assets remain frozen, the impact is spreading across traders, banks, and suppliers, with smaller companies facing the greatest pressure. Regulators are now working to understand the full scale of losses and prevent similar risks from growing unnoticed.
The sudden collapse of Xu Maohua’s trading network has exposed how fragile and interconnected parts of China’s metals market have become, leaving financial losses and legal battles in its wake.