Chinese gold imports tipped to drop in loan deals fallout

PUBLISHED : Friday, 04 July, 2014, 1:41am
UPDATED : Friday, 04 July, 2014, 5:10am

Chinese gold imports could fall by up to 400 tonnes this year as the central government tightens controls on gold financing deals and domestic demand softens, a leading precious metals consultant said yesterday.

Philip Klapwijk, a director of Hong Kong-based Precious Metals Insights, said the Chinese authorities were once again moving to rein in abuse of gold lending, after a crackdown on commodity financing last year.

He said weaker import volumes in recent months - the mainland's gold imports from Hong Kong dropped in May to the lowest level since January last year - suggested the gold lending business was already being partly wound down.

In the full year, imports could fall by 300 to 400 tonnes, or as much as 22 per cent, he said.

"[Gold imports] will probably decline for the full year given the impact of firstly, weaker real demand in China compared to its outstanding level in 2013 and secondly, measures to restrict the abuse of gold lending and other financial plays using the yellow metal," he said.

"Total imports into China may have reached nearly 1,800 tonnes in 2013, taking into account unofficial and direct shipments.

"That figure will surely be several hundred tonnes lower in 2014 … it is another headwind for any rally in gold this year, and it also means the price floor may be a bit shakier."

Gold prices are up nearly 10 per cent this year after falling last year for the first time in more than a decade, but remain more than 30 per cent below 2011's record highs.

A report from the World Gold Council earlier this year, based on research by Klapwijk, said gold imported into China was being used through gold loans and letters of credit to raise low-cost funds for business investment and speculation. It estimated that up to 1,000 tonnes of gold, worth about US$42 billion at current prices, could be tied up in these transactions.

"In short, you have in China a very large 'surplus' of gold - cumulatively over 2,000 tonnes in the last four years - that can mostly only be explained by either private sector financial use of gold or official purchases," Klapwijk said.

The mainland's chief auditor said last week gold processing firms had since 2012 used falsified gold transactions to borrow 94.4 billion yuan (HK$117.7 billion) from banks.

Klapwijk said the unwinding of gold financing deals could reverse the flow of physical gold, which has moved from west to east in recent years as gold stored to back exchange-traded funds in London and New York was shipped east to meet Chinese demand after investors sold ETFs.