China banks boost precious metals hoard amid lease demand


From Bloomberg News
Monday, September 1, 2014

The value of precious metals held by China's biggest lenders surged 66 percent from a year ago as banks lease more gold to customers because tighter borrowing rules make it harder to lend funds.

Precious metals held by Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd., and Bank of China Ltd., the country's four biggest lenders, were worth 378 billion yuan ($62 billion) at the end of the second quarter, according to financial reports. The growth since last year outpaced the gain in benchmark bullion prices, which rose 7.5 percent over the same period.

China is seeking to rein in credit by raising borrowing costs and cutting off lending to sectors considered at risk of default amid a property slump and rising number of bad loans. That's prompting banks to hold more precious metals as they expand their gold-leasing business because it's not subject to loan caps and is considered off-balance sheet lending, according to Industrial Bank Co.

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"Gold-based financing has grown a lot in the past year," Duan Shihua, a partner at Shanghai Leading Investment Management Co., said by phone from Shanghai Aug. 29. "It's clear from banks' statistics that lots of companies in China still can't get enough financing."

Precious metals assets at banks are valued against the Shanghai Gold Exchange prices on the last day of the reporting period and most of the banks' holdings are in gold, Jiang Shu, a senior analyst at Industrial Bank Co., said by phone from Shanghai.

The lenders' holdings were the equivalent of about 1,445 metric tons of gold, based on June 30 prices, up 55 percent from the year before. That's more than the 1,054 tons that China's central bank has in reserves, according to World Gold Council data.

Bullion of 99.99 percent purity, the benchmark spot contract on the Shanghai Gold Exchange, was at 261.86 yuan per gram June 30, compared with 243.5 yuan a year earlier. It traded at 255.14 yuan yesterday.

The value of precious metals held by ICBC, the country's biggest bank by market value, more than doubled to 91 billion yuan over the period, according to its financial report. That's the equivalent of about 347 tons of gold, based on June 30 prices, up from about 158 tons a year earlier.

ICBC had rapid growth in both its precious metals leasing business and a gold accumulation program whereby individuals put aside a fixed sum of money each month to buy bullion, the company said in its earnings release Aug. 28. Wang Zhenning, a spokesman for ICBC in Beijing, declined to comment when contacted by Bloomberg News.

There are two types of gold leasing deals.

In the first, a customer borrows the metal from the bank and simultaneously enters a forward agreement to hedge price risks, according to ICBC's website. That allows the company to obtain cheaper credit because the lending fee is lower than the interest rate of a loan of the same tenure.

In physical leasing, the customer in a gold-related industry borrows the metal for business needs and repays it at the end of the lease period, according to the bank's website.

China Construction Bank, the country's second-largest lender, held 51 billion yuan of precious metals as of June 30, the equivalent of about 194 tons of gold. That compares with 33 billion yuan a year earlier, according to its second-quarter financial report, or 137 tons of gold. Nobody answered two calls to its press office in Beijing.

Agricultural Bank of China, the country's third-largest lender, held 21 billion yuan of precious metals as of June 30, the equivalent of about 81 tons of gold. That compares with 17 billion yuan, or 70 tons of gold, a year earlier, according to its second-quarter financial report. A Beijing-based spokeswoman for the bank declined to comment.

Bank of China's precious-metals holdings were 215 billion yuan at the end of June, or the equivalent of about 823 tons of gold, compared with 570 tons a year ago, financial data show. Nobody answered two calls to the bank's press office in Beijing.

Holdings may be capped as physical demand slows and the use of commodities to raise financing is scaled back, according to Na Liu, a China strategy adviser to Scotiabank. The nation's gold consumption plunged 52 percent to 192.5 tons in the second quarter from a year earlier as buyers purchased fewer bars, coins, and jewelry amid a clampdown on corruption, the World Gold Council said Aug. 14.

Investigations into the fraudulent use of raw materials as collateral in loans may also reduce demand for precious-metals leasing, according to Liu Xu, a Beijing-based analyst at Capital Futures Co. Banks are increasing scrutiny of commodities financing as public security officials probe whether copper and aluminum were pledged multiple times at the port of Qingdao.

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