Banks in China Stockpile Gold as Lease Demand Surges

Gold Lease

(Bloomberg) – The value of precious metals held by Chinese major banks increased by 66%, two-thirds its value from a year ago. Banks in China lease gold to their customers as the borrowing rules are to too stiff making it hard to lend funds.
The 4 biggest lenders in China; Bank of China, China Construction Bank, Industrial & Commercial Bank of China and Agriculture Bank of China, hold precious metals of $62 billion value at the end of 2014 second quarter.

Due to the late world debt crisis, Chinese government is exerting control over credit by raising borrowing costs and reducing landings to sectors at risk of default. The worldwide increased number of bad loans and property nose-dive increased fears of loans and borrowing. Banks held precious metals in order to expand gold leasing as a way to “lend” without being a subject to loan caps.
According to Chinese businessman, partner at Shanghai Leading Investing Management, Duan Shihua, the demand for financing in China is more than the supply and “gold-based” financing grew exponentially in the past year.

Chinese banks lease gold by two deals; the first is the customer burrow gold from the bank while entering a forward agreement to hedge price risks. The other one is physical leasing, where the customer in gold-related industry borrow the gold for business and repays at the end of the lease period. The first deal allows companies to obtain cheaper credits as the lending fees are lower than the interest rates of the loans.

Jiang Shu, senior analyst at Industrial Bank said that precious metals assets, such as gold, are valued against the prices of Shanghai Gold Exchange (SGE) on the last day of the reporting period.

Benchmark spot contract on SGE rose on June 30 to 261.86 Yuan/gram from 243.50 Yuan/gram a year earlier. Today, gold in SGE was trading around 252.80 yuan.

On June 30, banks holdings of gold were around 1,445 metric tons, a 55% increase from the previous year. Note that according to World Gold Council (WGC) data, China’s Central Bank holds 1,054 metric tons of gold as reserve.

The following information is according to Bloomberg’s report. China’s biggest bank by market value, the ICBC, doubled its value f precious metals holdings to 91 billion Yuan over the year. Based on gold price on June 30, the bank’s holdings rose from 158 tons to 347 tons.

China Construction Bank, the second biggest lender in China, held precious metals worth 51 billion Yuan, around 194 tons of gold. A year earlier, the bank held 33 billion Yuan of precious metals, 137 tons of gold.

Agriculture Bank of China held precious metals worth 21 billion Yuan, around 81 tons of gold. A year earlier, the bank held 17 billion Yuan of precious metals, 70 tons of gold.

Bank of china held 215 billion Yuan worth of precious metals, around 823 tons of gold. A year earlier, the bank held 570 tons of gold.

China’s gold consumption declined 52% in the second quarter of the year as physical demand on gold decreased. A WGC report said on August 14 that a crackdown on corruption has a hand in the weaker demand on gold bars, coins and jewelry.