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

Updated: Tuesday April 15, 2014 MYT 12:15:54 PM

China may have 1,000 tonnes of gold tied in financing: WGC

A customer looks at a golden figurine on display for sale at a department store in Beijing. In China, imported gold is being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation, says the World Gold Council – Reuters Photo.

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

The financing-related buying in the world’s biggest bullion consumer means gold prices could come under pressure if imports are 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 US Federal Reserve unwinds its stimulus.

“Imported gold is being used via gold loans and letters of credit (LC) to raise low cost funds for business investment and speculation,” according to a report by the World Gold Council (WGC) released on Tuesday.

“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$43bil at current prices

The estimates come from Precious Metals Insights, a Hong Kong-based consultancy firm that was commissioned by the WGC to lead the survey on China.

Most of the gold stuck in financing deals has been built up since 2011, the report said, adding that borrowers typically hedge the gold risk.

The WGC, a producer-funded industry body, forecast Chinese demand for gold would increase by 25% to at least 1,350 tonnes by 2017. However, growth in 2014 could be limited after a sharp jump in buying last year, it said.

Gold prices have gained 10% so far this year, buoyed by heightened geopolitical tensions in Ukraine and volatile equities.

COPPER AND IRON ORE HIT

Chinese firms have been using various commodities to obtain credit after a tightening of traditional sources. Copper, iron ore, rubber, soybeans are all being used along side gold.

China has up to US$160bil of outstanding loans using commodities as collateral, about 31% of the country’s short-term foreign exchange loans, according to Goldman Sachs.

Last month, copper and iron ore prices took a hit on concerns that an increasing crackdown on such financing models could release a huge amount of stock into the market.

“Gold loans or LCs 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,” Tuesday’s WGC 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.

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

The WGC report said that the surplus in the market could either be from official sector purchases such as central bank buying or the extensive use of gold for financial operations.

“While there is some uncertainty about whether there have been official purchases of gold in the domestic market, such doubts do not exist when it comes to the large-scale use of gold for purely financial operations in China,” the report said.

“Unless either the PBOC (People’s Bank of China) cracks down more severely and effectively on commodity financing or the credit allocation and pricing system in China is improved, substantial amounts of gold may continue to be imported and tied up in financial operations.” – Reuters