* Estimates imply strong imports driven by trade financing
* Imported gold used via loans, LCs to raise low cost funds
* Total China demand to grow 25 pct over four years
By A. Ananthalakshmi
SINGAPORE, April 15 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 U.S. 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 $43 billion 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 percent 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 percent so far this year,
buoyed by heightened geopolitical tensions in Ukraine and
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 $160 billion of outstanding loans using
commodities as collateral, about 31 percent 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."
(Editing by Ed Davies)