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China Finds $15 Billion of Loans Backed by Fake Gold Trades

By Bloomberg News
June 26, 2014 10:13 AM EDT 42 Comments
One kilogram gold ingots are displayed for a photograph at a gold dealer in Beijing, China.
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 billion yuan ($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’s website.

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.

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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