Audit Commission seized nearly 100 billion gold false transactions

In the early morning of June 27th, Beijing time, the media quoted the report of China National Audit Office on Thursday. The official investigation found that 94.4 billion yuan ($15.2 billion) of loans since 2012 were related to possible illegal gold-guaranteed financing transactions. This conclusion may lead to broader concerns about China's large metal-backed financing activities.

A report issued earlier this week by the National Audit Office said that inspections of 25 gold companies showed that there were a large number of improper gold-guaranteed loans designed to benefit from interest rate and exchange rate differences. According to the report, these loans have made the gold companies involved in them more than 900 million yuan in profits.

In its report, the Audit Commission described these gold financing transactions as “inappropriate”, but did not specify the institutions involved, how the transactions were structured, or why they were considered illegal, and only hinted at the possible trades in the terms. It is illegal. Audit did not respond to media calls for comments.

The cycle of this report of the Audit Commission began in 2012, but the time frame for coverage was not clearly stated. Some analysts pointed out that Chinese banks have begun to tighten supervision of gold-guaranteed financing transactions in the past few months, indicating that they may have been warned about these loans. Hu Yanyan, a gold analyst at Everbright Futures in Shanghai, said: "Since 2014, they have made great reservations in issuing letters of credit to gold companies."

At the time of the release of the audit report, the authorities were also investigating the issue of the same batch of metal stocks in Qingdao Port being used to apply for loans from a number of banks. Metal-guaranteed financing transactions are legal in China, but the investigation has slowed China's metal imports. It is unclear whether there is a link between the investigation activities of Qingdao Port and the latest report of the Audit Commission.

Some analysts pointed out that the findings of the Audit Commission and the widespread concerns about metal financing transactions may make the government's recent measures to allow China's gold market to have more freedom to be more complicated in the prospects for advancement. China has been strictly controlling the gold trade, allowing only 12 banks to import gold and closely monitoring their import activities through a quota system. But in 2014, the Chinese government has begun to allow foreign banks to play a bigger role in the trade of gold.

Analysts pointed out that banks sell or lend gold to gold producers, which in turn use gold as collateral for financing transactions. The Goldman Sachs Group wrote in a March report that “Gold is a clear candidate for a commodity finance deal, with a very high value-to-density ratio, a well-developed paper market, and a very long shelf life. ”

According to the analyst's description, in a typical gold-guaranteed financing transaction, mainland Chinese manufacturers obtain a letter of credit from a Chinese bank using imported gold stored in the mainland or Hong Kong bonded warehouses; manufacturers usually pass one Overseas subsidiaries use a letter of credit to obtain a US dollar loan from a foreign bank. The funds will be converted into RMB and invested in financial instruments with higher yields in the mainland market.

The key to such transactions is the profit margin difference between US dollar loans and funds invested in China. According to Goldman Sachs Group estimates, since 2010, traders have used metals as collateral to bring in about $110 billion in funds to China.

China is the world's largest consumer of gold. According to a report released by the China Gold Association in February, consumer purchases in 2013 were 41% year-on-year, mainly driven by demand for jewellery. China does not disclose specific gold trade data.

However, some analysts pointed out that the issue of financing transactions is unlikely to reduce China's long-term demand for gold. Frank Tang, a metals analyst at investment bank Blue Oak Capital in Beijing, said, “China’s gold consumption is very large and it is difficult to completely prevent gold-backed financing activities.”

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