* 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
(Adds comments from Chinese banks, analysts)
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 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 top gold
consumer means prices could come under pressure if imports are
hit by a broader crackdown on using commodities for finance.
The report - issued by the World Gold Council (WGC) on
Tuesday - and other sources in China said gold was not as widely
used for raising money as copper, which saw prices drop to a
3-1/2 year low in March on fears that those deals would unravel.
"Imported gold is being used via gold loans and letters of
credit (LC) to raise low cost funds for business investment and
speculation," the report said.
"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 commissioned for the survey on China.
"If that number is accurate, it is significant because an
unwind of that is equivalent to a year's worth of (Chinese)
imports," said Victor Thianpiriya, an analyst at ANZ Singapore.
"Having said that, it's unlikely that it would flood the
market in one go, and over time I think there is enough demand
in China to absorb it."
The practice of importing gold simply to raise funds is
being conducted by wealthy individuals and firms for cheap
short-term financing either for business or speculation to
circumvent capital controls, the WGC report said.
It can be used for real estate purchases, or to speculate in
higher yielding assets, and interest rate or currency arbitrage.
Other than using gold only for funding needs, the metal is
also used widely by bullion producers and jewellery makers as
collateral for loans.
Most of the gold in financing had been built up since 2011,
the report said, with borrowers typically hedging the gold risk.
Data from Hong Kong shows that China's gold imports started
rising dramatically from 2011. (For a graphic link.reuters.com/waq74v)
"We think that the rapid growth of the market size of gold
trading between China and Hong Kong created from 2009 to 2013
(from below $5 billion to roughly $70 billion) is most likely
driven by gold financing deals," Goldman Sachs said in a note in
The WGC report forecast Chinese gold demand would grow by 25
percent to at least 1,350 tonnes by 2017, though growth in 2014
could be limited after record amounts of buying last year.
NOT AS BIG AS COPPER
Chinese firms have been using various commodities to obtain
credit after restrictions on traditional sources. Copper, iron
ore, rubber, soybeans are all being used alongside 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.
Goldman estimates that up to 1 million tonnes of copper and
30 million tonnes of iron ore is tied up in financing deals.
"I do not think there is large scale gold trade-financing
deals like in copper," said Jiang Shu, an analyst with
Industrial Bank, one of the few gold-importing banks in China.
Import quotas and a limited number of banks allowed to
import meant gold would not be a popular choice for commodity
financing deals, he added.
The People's Bank of China (PBOC) strictly controls gold
imports through quotas, with only 12 banks allowed to import.
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 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 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
(Editing by Ed Davies)