(Corrects March and Feb gold flows numbers in last paragraph of
May 22 story)
* Chinese banks cutting loans to gold, metals firms
* Targeting Chinese firms involved in transit trades
* Clampdown to have limited impact on gold imports
By Fayen Wong and Polly Yam
SHANGHAI/HONG KONG, May 22 Chinese commodities
firms importing everything from gold and rubber to base metals
are struggling to get trade loans as banks scrutinise their
activities and hold back credit following Beijing's orders to
rein in currency speculation.
China is the world's top consumer of base metals and
rubber, and the second-largest gold buyer after India. A crimp
in imports as financing becomes harder will be bearish for the
international benchmark prices of these commodities, but could
mean their domestic prices will be supported.
The latest crackdown mainly targets companies that are
heavily involved in buying and selling imported goods stored in
bonded warehouses within China's tariff-free areas. Those that
import raw material into the country for their own consumption
are less affected.
Banks in Guangdong province such as Industrial and
Commercial Bank of China, the country's No.1 bank, and
China Minsheng Bank have stopped issuing
letters-of-credit (LCs) with long maturity dates to some
jewellers, which import gold into the mainland for export
"All (companies) cannot get LCs for transit trade in
Guangdong at the moment," said a source whose firm trades base
metals and manufactures aluminium products in the southern
province. He was referring to the trading of bonded stocks.
ICBC and Minsheng could not be reached immediately for
China's gold market is tightly controlled, with import
licenses granted to a handful of banks and export permission
given only to authorised jewellery makers. The latter are mostly
in manufacturing centres, such as within the bonded customs
area in Shenzhen and gold processing centres in Guangdong.
In the Panyu and Huadu districts in Guangzhou city in
Guangdong, there are over 900 jewellery makers. Their close
proximity to Hong Kong has allowed the two areas to become an
important jewellery processing base for exports.
Some jewellery makers, trade sources said, have used LCs
with maturities of up to a year to import gold as raw material.
They would then export gold products, in many cases to their
Hong Kong subsidiaries, at higher-than-market values and bring
back the yuan into China.
Hong Kong holds the biggest pool of yuan outside of China
and is one of the few centres from where the yuan can be
repatriated to the mainland.
The yuan would be invested in sectors such as property or
the higher-interest bearing accounts of Chinese banks or in
financial products that offer returns of at least 4-6 percent
per annum. That compares with borrowing costs of around 2
percent a year for the dollar in Hong Kong.
Such trades are also profitable because with the currency
rising - the yuan has hit record highs against the U.S. dollar
since April - fewer yuan are required to repay the dollar loans.
In some cases, the gold importers would tie up with
overseas investors who were looking to circumvent China's strict
capital controls and profit from currency movements, trade
But these deals have contributed to a ballooning trade
surplus, the sources said. China ran a capital and financial
account surplus of $102 billion in the first quarter, up from
$20 billion in the fourth quarter of last year, reflecting the
heavy capital inflows.
The distortions led Beijing to set new rules earlier this
month to stop fake trades. The rules, to take effect from June
1, require banks to tighten the management of their foreign
exchange lending and types of clients that are able to access
The country's currency regulator has said it will issue
warnings or even blacklist firms that are unable to provide
satisfactory explanations for the gaps in their trade
Banks in the coastal city of Qingdao in Shandong province,
a key tyre production hub, have also begun investigating some
100 rubber trading firms to crack down on fake trades, industry
participants said, although most rubber traders are still able
to secure loans.
"But as far as we know, there is no problem regarding banks
opening LCs for rubber traders ... Given China is the largest
consumer and buyer, they need loans to do the trading and there
is not a lot of false trading in rubber," said Bao Ying, an
analyst with Dadi Futures.
The tougher lending regulations is also set to affect
The clampdown would have some impact on gold imports in the
near term, analysts said, but volume is unlikely to drop
significantly as banks remain the largest importers.
"Unlike copper, gold isn't a popular financing tool because
it is less liquid," said Sun Yonggang, a gold analyst with
"Physical demand is also very strong in China so banks are
unlikely to shut off credit to the large jewellers for long."
The steep fall in international gold prices in April
unleashed years of pent up demand in China for coins, bars and
jewellery. Gold is down nearly 18 percent this
Even before the recent price plunge, imports were climbing.
Net gold flows from Hong Kong to China jumped to 136.185 tonnes
in March from 60.958 tonnes in February, smashing a previous
record of 114.372 tonnes in December, data from the Hong Kong
Census and Statistics Department showed.
(Additional reporting by Niu Shuping in BEIJING and Lewa
Pardomuan in SINGAPORE; Editing by Muralikumar Anantharaman)