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China Gold Trade Finance: Goldman Wrong, Says UBS

China gold imports "not boosted" by trade financing via Hong Kong...
GOLD TRADE financing is not a key driver of China's surging import data, says Swiss bank and bullion market-maker UBS. 
This counters analysis from US investment bank Goldman Sachs, which said last week that gold accounts for perhaps 30% of the trade financing total, if not more than other commodities combined, including copper.
Trade financing may have raised $250 billion for Chinese businesses since 2009, says UBS analyst Geoffrey Yu. Copper-related deals may account for 10% of all short-term loans now outstanding, says separate analysis from Deutsche Bank. The trade, explains Goldman Sachs, sees a mainland company buy physical commodities, held in "bonded" warehouses rather than taking delivery, from an offshore but related company, such as a subsidiary.
The seller receives a letter of credit from the buyer's bank (and so complies with Beijing's rules on such financing). It then uses that letter to raise a loan offshore, sending the cash into mainland China, where it's used by the mainland company to repeat the process.
Commenting today on February's sharp jump in China's net gold bullion imports through Hong Kong, "tight money conditions [are] fueling such deals as gold imports are being used for short-term financing," Bloomberg quotes Capital Futures analyst Liu Xu in Beijing.
The People's Bank of China has allowed money-market interest rates to rise towards last summer's sharp "credit crunch" spikes, even as the Yuan currency depreciates, in a stated plan to curtail both formal and non-bank lending.
China's gold imports through Hong Kong – which totalled a record 1,158 tonnes in 2013, or some 25% of total world gold flows – were 112 tonnes last month, new data show, almost twice the level of February 2013.
"Anecdotally" however, writes Swiss investment and bullion bank UBS's precious metals strategist Edel Tully, "feedback from the ground and conversations with various industry participants suggest that the gold financing trade is indeed taking place, but to a much smaller extent than in the copper market."
Rather than being explained by "round tripping" between mainland and offshore partners to raise finance, says Tully, the rise in mainland-to-Hong-Kong exports "can also be explained by jewelry manufacturers in China sending semi-manufactured gold to subsidiaries in Hong Kong for further processing."
From there, the finished items are either imported back into mainland China, or sold through Hong Kong stores enjoying booming trade with holiday travellers thanks to "more attractive consumer tax charges."
Concluding that consumer demand is driving the surge in imports, "We think gold's percentage in the total financing trade is relatively small," Dr.Tully says, "and in turn consider market estimates which suggest this trade could be as high as 30% to be far too large."

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