Fri, Jun 27, 2014 - Page 15 News List

China finds US$15bn of false gold-backed loans

COMMODITIES FINANCING:Chinese authorities are also investigating allegations of stockpiles of copper and aluminum being repeatedly pledged as loan collateral

Bloomberg

China’s chief auditor discovered 94.4 billion yuan (US$15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals.

Twenty-five bullion processors made a combined profit of more than 900 million yuan by using the loans to take advantage of the difference between onshore and offshore interest rates, and the appreciation of the Chinese currency, according a report on the National Audit Office’s Web site. China is the biggest producer and consumer of gold.

Public security authorities are also probing alleged fraud at Qingdao Port where the same stockpiles of copper and aluminum may have been pledged multiple times as collateral for loans.

As much as 1,000 tonnes of gold may be tied up in financing deals in China, in which commodities including metals and agricultural products are used to get credit amid restrictions on lending, according to World Gold Council estimates through last year.

“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 (劉旭), a senior analyst at Capital Futures Co (首創期貨) 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.”

Mark To (涂國彬), head of research at Wing Fung Financial Group (永豐金融集團) in Hong Kong, said the audit office’s report is unlikely to have a significant impact on the underlying demand for gold in China.

Steps by the Chinese government to rein in credit and inflation by raising borrowing costs since 2010 created a surge in the use of commodities as a means of getting access to cash from abroad.

These deals are worth US$81 billion to US$160 billion, according to projections by Goldman Sachs Group Inc, accounting for as much as 31 percent of the nation’s short-term, foreign currency loans.

The National Audit Office’s report was delivered by its chief, Liu Jiayi (劉家義), at a National People’s Congress meeting on Tuesday and posted on the office’s Web site. The report covers a period beginning in 2012 and does not specify an end date. It does not identify companies or banks.

An official in the media department of the audit office asked for inquiries to be faxed when contacted yesterday. There was no immediate response to faxed questions.

The investigation at Qingdao focuses on a company called Decheng Mining (德誠礦業) and its owner, Singaporean national Chen Jihong (陳基鴻), 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 were 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 that 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.

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