Chinese Commodity Finance System On Edge as $15 Billion in Gold Fraud Uncovered

To reiterate: the issue here isn't the missing commodities, it is the breakdown in the commodity finance system. That is the direct threat to the metals markets. More broadly, none of this is good news for credit growth.

With regards to the metals themselves, there is financial demand for gold because gold is money. There is no financial demand for copper and other industrial metals if the banking system does not allow them to be monetized or cannot monetize them due to fraud concerns. Without financing demand, the industrial metals either go to end users or get dumped on the market.

More broadly, these loans flowed into speculative real estate, much of it likely in the form of high interest rate loans to developers (we don't know if that's the case with gold yet, but it is the case with copper, steel and other commodities). There is a network of fraudulent lenders who conspired to defraud banks and have guaranteed each others' loans, putting them all on the hook for bad debts. These scandals are systematic to a local economy or an industry, and this latest gold scandal involves 25 firms. It's the same pattern seen over and over again in China, with the steel traders, the copper traders, in Xiaoshan, Wenzhou, etc. Beyond these companies then, are dozens upon dozens of firms who are suppliers and customers.

China economic system is also pro-cyclical. The demand for industrial commodities is fueled by these financing deals which funnel debt into the real estate sector. Commodity demand also backs China's sovereign wealth fund investments. Many emerging markets export commodities, and emerging markets are the main source of growing demand for Chinese exports. The growth in China's economy and the financial demand for commodities was all boosted by rapid credit growth. That rapid growth is over. So while these financing deals are big news, the really big story is whether this isn't the start of something much larger.

FT Alphaville wonders in When commodity collateral shenanigans go wrong:
The biggest implication of the missing collateral revelations is if foreign trade partners, who have financed much of this speculation. are put off and withdraw that cheap dollar liquidity even further.

That, at the end of the day, will put pressure on the yuan and extend the potential dollar short problem, which may only be resolved via a direct swap line with the PBOC and the Fed, or a liquidation of some of China’s public dollar reserves.
If dollar reserves are liquidated, the yuan goes down in HK. It fell when reserves simply stopped growing or dipped very very slightly in 2011 and 2012. A similar move to the ones back then would take the yuan below 6.30 offshore.

Bloomberg on the fraud:
China Finds $15 Billion of Loans Backed by Fake Gold Trades
China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, adding to signs of possible fraud in commodities financing deals.

Twenty-five bullion processors in China, the biggest producer and consumer of gold, made a combined profit of more than 900 million yuan from the loans, according to a report on the National Audit Office’s website.

Some gold firms (and money printers) are also in trouble for lying to the government about their assets and profits, which was uncovered by an audit of the central bank.

Part of the assets and liabilities of enterprises directly under the profit and loss is not real

Compared to the central headquarters and branch offices, central banks and enterprises directly under the China Gold Coin Corporation China Banknote Printing and Minting Corporation (hereinafter referred to as the Gold Coin Corporation, the note Corporation) and its subsidiaries existing main problems may be more representative .

First, some units balance profit or untrue.

The audit found that from 2009 to 2013, Shanghai Banknote Printing and Minting Co., Ltd and Shanghai will place financial subsidies and other types of grants 9,817,500 yuan between subjects included accounting, resulting in less total revenue, which in 2013 4,486,600 yuan;

2012-2013, Xi'an Printing Limited, Shenyang Mint note Corporation Limited and Multi accruals 3,012,200 yuan, of which 2013 2,412,200 yuan;

The end of 2013, Gold Coin Corporation and other five units total assets of 1.061 billion yuan less.

Secondly, part of the non-compliance of financial management units.

For example, in 2013, Beijing Kaiyuan China Gold Coin Distribution Centre 108 million yuan according to the specified VAT taxable sales invoice;

2013, Beijing Banknote Printing Co., Ltd., Shijiazhuang Printing Limited and Technology Co., Ltd. in the use of special security note irregularities invoices for reimbursement of expenses 1.4292 million yuan;

2013 in banknote printing Co., Ltd. 7 Guanghua accounts using non-standard units, involving an amount of 4.6505 million yuan;

The end of 2013, Gold Coin Corporation and the Corporation notes the existence of long-term receivables and other financial issues, such as losses are 51,290,900 yuan.

Third, the general public is more concerned about compensation management, audit also found some problems. For example, from 2012 to 2013, Beijing New Era Gold Man Culture Communication Co., Ltd., 13 units of bonuses and subsidies in addition to total wages 25.913 million yuan, of which 25.3369 million yuan in 2013;

From 2006 to 2013, the Corporation and other six units notes exceed the standard pay "insurance policy" and 183.1845 million yuan, of which 2013 181,101,200 yuan;

2010-2013, Gold Coin Corporation exists to employ retired cadres affiliated companies or executives in the office to receive remuneration.

In addition, the audit also found several other problems spending irregularities.

As in 2013, Chengdu Banknote Printing Co., Ltd., 10 units of fees charged to the publicity, money and other gifts purchased hospitality, involving an amount of 6.6252 million yuan;

2013, Baoding banknotes Paper Co., Ltd., 5 units of official vehicles that exceed the standard configuration, involving an amount of 5.0028 million yuan.

For problems found in the audit, the Audit Commission recommendations: The People's Bank should further strengthen budget management, standardize accounting, strengthen the supervision and inspection of branches and enterprises belongs budget execution and financial management.

Audit report also showed that the People's Bank to carry out self-examination before the audit and correct some of the self-identified problems. Audit findings, the People's Bank is organizing for rectification, now part of the relevant branches have been adjusted accounts. Specific rectification results announced by the People's Bank to the public.

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