By Bloomberg News Jun 26, 2014 3:13 PM GMT
Photographer: Nelson Ching/Bloomberg News
One kilogram gold ingots are displayed for a
photograph at a gold dealer in Beijing, China.
China’s chief auditor discovered 94.4 billionyuan ($15.2
billion) of loans backed by falsified gold transactions, adding to signs of
possible fraud in commodities financing deals.
Twenty-five bullion processors in China, the biggest
producer and consumer of gold, made a combined profit of more than 900 million
yuan from the loans, according to a report on the National Audit Office’swebsite.
Public security authorities are also probing alleged
fraud at Qingdao Port, where copper and aluminum stockpiles may have been
pledged multiple times as collateral for loans. Steps by the Chinese government
to rein in credit by raising borrowing costs in recent years created a surge in
commodities financing deals that Goldman Sachs Group Inc. estimates to be worth
as much as $160 billion.
“This is the first official confirmation of what many
people have suspected for a long time -- that gold is widely used in Chinese
commodity financing deals,” said Liu Xu, a senior analyst at Capital Futures
Co. in Beijing. “Any scaling back by banks of gold-backed financing deals might
lead to a short-term reduction in Chinese imports and also spur some sales by
companies looking to repay lenders.”
As much as 1,000 metric tons of gold may have been
used in lending and leasing deals in China,
where commodities including metals and agricultural products are used to get
credit amid lending restrictions, according to World Gold Council estimates.
The Singapore government is promoting the city-state
as a center for precious metals... Read More
Gold Price
Gold declined for the first time this week in London
on concern that an advance to a two-month high is curbing physical buying and
as investors weigh the outlook for the U.S. economy.
Bullion for immediate delivery traded at $1,314.75 an
ounce by 3 p.m. in London, down 0.3 percent from yesterday, according to
Bloomberg generic pricing. Prices dropped as much as 1 percent earlier today.
Any clamp-down by Chinese authorities on financing
deals involving the metal would probably put downward pressure on gold prices
in the short-term, said Jens Naervig Pedersen, a Copenhagen-based analyst at
Danske Bank A/S.
China’s gold imports from Hong Kong fell 20 percent in
May from a month earlier as increasing volatility in the Chinese currency made
the precious metal less appealing to local investors.
Net imports totaled 52.3 tons last month, compared
with 65.4 tons in April and 106 tons a year ago, according to calculations by
Bloomberg News based on data from the Hong Kong Census and Statistics
Department today.
Mark To, head of research at Wing Fung Financial Group
in Hong Kong, said the audit office’s report was unlikely to have a significant
impact on the underlying demand for gold in China.
Biggest User
The global flow of bullion from west to east that’s
helped to make China the world’s largest user will probably last for as long as
two decades as rising incomes spur demand, according to the China Gold
Association.
The London-based gold council said it was confident
that any fraud in China did not affect its overall estimate for gold demand.
The National Audit Office’s report was delivered by
its chief, Liu Jiayi, at a National People’s Congress meeting June 24 and
posted on the office’s website. The report covers a period beginning in 2012 and doesn’t
specify an end date. It doesn’t identify companies or banks.
An official in the media department of the audit
office asked for inquiries to be faxed when contacted today. There was no
immediate response to faxed questions.
Qingdao Probe
The investigation at Qingdao focuses on a company
called Decheng Mining and its owner, Singaporean national Chen Jihong, according
to two bankers assisting with the probe by public security officials. Chen has
been detained, according to Singapore’s foreign ministry. He is also involved in a separate
inquiry in northwestern Gansu province, said the bankers, who asked not to be
identified because they’re not authorized to speak publicly.
Local lenders and foreign banks including Standard
Chartered Plc, Citigroup Inc. and Standard Bank Group said they are reviewing
potential fallout from any lending linked to Qingdao.
The Chinese agency that stockpiles strategic
commodities is checking to ensure its copper purchases are free of collateral
risks while the customs authorities issued new rules to help prevent goods
being pledged multiple times as collateral, people with direct knowledge of
these matters said previously.
Financing Transactions
Of the as much as $160 billion in transactions
projected by Goldman, $80 billion may involve gold, $46 billion copper, $13.8
billion iron ore and $10.3 billion soybeans, according to a March 18 report.
In some commodities financing transactions, owners of
raw materials sitting in ports use receipts from warehousing companies to get
credit from banks, which they put to work in high-yielding investments before
repaying the debt.
Other deals involve a Chinese buyer placing orders for
commodities with overseas companies and then applying for a letter of credit
from a lender, which they use to import the materials. The buyer can then sell
the consignment in the domestic market and use the money onshore at a higher
interest rate before repaying the original loan.
To contact Bloomberg News staff for this story: Feiwen
Rong in Beijing at frong2@bloomberg.net
To contact the editors responsible for this story:
Brett Miller at bmiller30@bloomberg.net John Deane
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