China may have 1,000 tonnes of gold in financing deals

PUBLISHED : Tuesday, 15 April, 2014, 3:43pm
UPDATED : Wednesday, 16 April, 2014, 12:55am

Chinese firms could have locked up as much as 1,000 tonnes of gold in financing deals, an industry report said, indicating a big slice of imports has been used to raise funds due to tight credit conditions, rather than to meet consumer demand.

The financing-related buying by the world's biggest bullion consumer means gold prices could come under pressure if imports were hit by a broader government crackdown on using commodities to raise finance. Gold has been increasingly reliant on China for support due to outflows from exchange-traded funds and as the United States Federal Reserve unwinds its stimulus.

"Imported gold is being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation," said a report by the World Gold Council.

"The use of gold for purely financial operations is a form of demand that represents a small part of the much wider growth in shadow banking. It is feasible that by the end of 2013 this could have reached a cumulative 1,000 tonnes."

That accounts for almost a third of annual global production and is worth about US$43 billion at current prices. The estimates come from Precious Metals Insights, a Hong Kong-based consultancy firm commissioned by the council to lead the survey on China. Most of the gold stuck in financing deals had been built up since 2011, the report said, adding that borrowers typically hedged the gold risk.

The council forecast Chinese demand for gold would increase 25 per cent to at least 1,350 tonnes by 2017. However, growth this year could be limited after a sharp jump in buying last year, it said. Gold prices have gained 10 per cent so far this year, buoyed by heightened geopolitical tensions in Ukraine and volatile equities.

Chinese firms have been using various commodities to obtain credit after a tightening of traditional sources. The country had up to US$160 billion of outstanding loans using commodities as collateral, about 31 per cent of its short-term foreign exchange loans, said Goldman Sachs. Last month, copper and iron ore prices took a hit on concerns that a crackdown could release a huge amount of stock into the market.

"Gold loans or [letters of credit] used to import gold offer wealthy individuals and companies a form of cheap short-term financing either for business or speculation. They can also be used to circumvent capital controls to bring funds into China," the gold council's report said. Gold is also being used to raise funds for real estate purchases, speculation in higher-yielding assets and interest rate or currency arbitrage.

The mainland imported a record 1,160 tonnes of gold from Hong Kong last year, in addition to about 428 tonnes of local production. The council has said Chinese demand in 2013 was about 1,066 tonnes, leaving the industry guessing about the "surplus" of about 522 tonnes.