A FRAUD investigation into metal financing at the world's seventh-busiest port has prompted banks and trading houses to make very clear the risks involved in storing commodities in China's warehouses.

The probe at Qingdao port centres around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing.

Some banks have asked clients to shift metal, used as collateral for loans, to more regulated London Metal Exchange (LME) warehouses outside China or those owned and operated by a single warehouse firm to limit their exposure, Reuters reported.

"The banks still haven't looked under the hood," said an unnamed executive at a bank involved in commodity financing in China in reference to the country's warehousing sector.

At the heart of the issue is China's roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere.

Although many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations.

Using commodities as collateral in financing in China is common practice and legal, but issuing receipts to repeatedly mortgage an asset is fraud and could leave more than one creditor holding claims to the same collateral.

Illustrating how difficult it may be to unravel competing claims, China's CITIC Resources Holding said that a court had been unable to secure more than 100,000 tonnes of alumina stored at Qingdao port.

Traders said there was a risk the metal could have been already claimed before part of Qingdao port was sealed off, adding that at least two trading houses had moved metal out as soon as news of the scandal broke.

CITIC Resources said it would conduct its own investigation and was considering further legal action.