2014-07-07

More Evidence Gold Situation Unlike Copper, Steel and Iron Ore

When currency and interest rate arbitrage forced up the value of the yuan in spring 2013, gold was featured as a prominent metal for fake importation. The gold trade was conducted in Shenzhen, whereas copper and iron ore were done in places such as Qingdao and Tianjin. What's striking so far is that it appears the gold was used for financial arbitrage. The loans in question amount to perhaps $90 billion or more, but thus far there's no news that suggests the money went into real estate or high interest loans on the fringes of the financial system (though that is a possibility). Instead, it flowed into Chinese banks, where the deposit rate was above that of the HK by several percentage points. For every $1 million borrowed, a borrower could earn ¥30,000 to ¥40,000 with little risk, paying off the loan once the deposit matured.

These cases show how gold is a premium asset: borrowers didn't even need the gold to obtain bank capital. They weren't gold traders piling up the metal in warehouses. Furthermore, until there's evidence to the contrary, it appears the holders of gold who engaged in these speculations took the lowest risk possible with their ill gotten loans, sticking with financial arbitrage.

被异化的黄金贸易融资故事:套取汇差、利差
"In commodities, especially gold as the carrier of hot money may not come from the international capital predators, is often the small trading company humble." Do a cross-border investment in commodity trading manager of the "First Financial Daily" said . Following the steel trade financing, financing for iron ore and copper finance, trade finance gold gradually surfaced. The National Audit Office's latest report shows that random 25 gold processing enterprises fictitious business background since 2012, cross-border, cross-currency loans reached 94.4 billion yuan rolling cycle, taking the exchange differences and spreads over 900 million yuan.

The industry sources said, in addition to taking foreign exchange differences and spread, if the flow of funds from the bank taking the field of real estate, trusts, etc., will gain considerable profits.

"Chose gold because of higher gold values, small size, easy to transport, but only after the more popular gold processing trade finance in 2011 because of the processing trade, and all use of imported raw materials, customs not impose export duties." Traders Zhang Liming (a pseudonym) told the "First Financial Daily" reporters.

Gold processing trade: cash in exchange and interest rate differential

Using gold processing trade, imports of gold raw materials, simple processing re-export, has become a major gold chain trade finance.

"Gold processing trade financing and other commodities like nothing more than onshore processors A gold credit paid to the offshore subsidiary B, imports of gold to the Free Trade Zone, the offshore subsidiary B received a letter of credit to make dollar funding, borrow dollars from offshore banks, the borrowing cost is lower than the mainland, the company received $ A money offshore subsidiary of B, the simple processing of gold exports. "Zhang Liming to the" First Financial Daily "simply describes this funding across throughout the process.

"Simple processing costs low, down through repeated import and export of the way, not only can achieve arbitrage, you can also expand trade, and access to high loans." Zhang Liming also said that Hong Kong's offshore RMB (CNH) and onshore renminbi ( CNY) against the U.S. dollar exchange differences often exist, can be achieved when a high of 300 to 400 points, $ 1 million more than in the mainland can change 30,000 ~ 40,000 yuan.

Gold processing trade is likely just one gold arbitrage approach China International Futures Co., Ltd. Research Institute Wang Hongying on the "First Financial Daily" said: "The iron ore and other financing more than exist in the port of Tianjin, Qingdao and Hong Kong and other places, The gold financing mainly concentrated in Shenzhen. ore and copper tend to be long arbitrage, ie the physical commodity traders hands, but in Shenzhen, even the existence of the gold bear market arbitrage, ie only need gold to buy the contract, do not even need from Hong Kong's actual buying physical gold can get credit from the bank. "

Mainland, Hong Kong is currently the gold out of the main window, as Hong Kong's offshore RMB exchange rate and the mainland onshore renminbi exchange rate movements are not entirely consistent, appreciation of the RMB offshore market is more obvious, and the Hong Kong market, lower borrowing rates, foreign exchange rate and interest rate has also become a major source of arbitrage traders.

Hong Kong Trade Development Bureau data show that the gold trade between the Mainland and Hong Kong in 2009 from less than $ 5 billion in 2013 soared to nearly $ 70 billion. According to the Hong Kong Census and Statistics Department data, in 2013 the total amount of the annual Hong Kong's exports to the mainland nearly 1,495,000 kg of gold, of which 86% were re-exports, only 14% of direct exports.

Last May, the media quoted the official investigation report, gold simple processed products do not meet consumer demand, simple processing products are not sold on the open market in Hong Kong, it will not market in the Mainland. January to April 2013, the Shenzhen Customs District of the total gold simple processing exports about $ 3 billion, compared with Shenzhen Customs District of processing trade exports grew 59%, but if you take out the gold simple export processing zone of Shenzhen customs processing trade export growth rate will drop 10 percentage points.

In accordance with the provisions of the Central Bank, gold import and export permit system. At present, only 12 commercial banks with gold export qualifications, commercial banks are required to sell after importation of imported gold in the Shanghai Gold Exchange platform. However, with the direct import of gold and its products different from gold processing trade does not require central bank approval, which is an important financing channel for gold, it is also where the target of the audit report, the gold processing enterprises.

"Only 25 gold processing trade enterprises through fictitious loans have done more than 900 billion yuan, the scale seen all this number is likely much greater than." These investment managers on the "First Financial Daily" said.

Capital flows mystery

Another anonymous traders on the "First Financial Daily" said, poor access to short-term interest rate and exchange traders only part of the source of profits, the credit period is often out of the bank three months to six months, if capital flows Other areas, such as real estate, trusts, profit is even more impressive.

CASS Institute of Finance researcher Yixianrong recently wrote that this commodity finance not only has serious financing arbitrage tendency to use foreign capital is converted into a low-cost high-interest yuan, and these high interest rates of RMB financing obtained after shadow banking through various channels into the domestic real estate market and local government financing platform. We can say that these products will not only severely weaken the central bank financing of monetary policy and on the shadow banking governance, but also to the domestic financial system could bring enormous risk.

Yixianrong also believe, as to what is the use of these funds, the flow where the bank is not known. China trading company when the credit due for repayment, it is possible to use another financing to pay for the same. See that these opaque commodity finance is complicated, long-chain financing, many aspects of the government can not control, prone to false fraudulent behavior, the risk is particularly high.

However, these investment managers also said: "No need to demonize this financing, in the final analysis there is no market or exchange, if the RMB exchange rate has been properly reflected, there will be no funding opportunity."

"Copper, zinc, palm oil and other commodities, in the case of domestic prices of 1% to 2% lower than foreign prices, traders still can not stop throwing them into the country, not to mention the price of gold is equal on both sides, we can see where the temptation . "This investment manager on the" First Financial Daily "analysts said.

According to the World Gold Council (WGC) Earlier studies in China, for the financing of gold at the end of 2013, the total could reach 1,000 tons, the size of about $ 43 billion. Prior to Goldman Sachs estimates that since 2010, the inflow through commodity trade financing activities of approximately 81 billion hot money in China - $ 160 billion, accounting for about 31% of China's foreign currency short-term borrowings, gold, copper and iron ore are the three main financing commodities.

World Gold Council had also said: "Unless China's central bank is more severe, more effectively combat acts of commodity finance, or China's credit allocation and pricing system has improved, it may still have a lot of gold to be imported for financing operations."

Previously, the prevalence of domestic false trade, leading to the influx of hot money, both with unilateral RMB appreciation, but also with the relevant commodity finance, eventually prompting regulators continue to strengthen the management of foreign exchange and import and export in the system.

Yixianrong suggested that the prevalence of commodity financing arrangements are largely financial system caused by inadequate or flawed, and that the biggest problem, or because too much government regulation of the financial markets, the market price mechanism is far reason (either exchange or interest rates) formation. To resolve the unpredictable risks of shadow banking, the most fundamental way is to accelerate financial market interest rate reform and market-oriented reform the exchange rate formation mechanism.

However, some analysts on the "First Financial Daily" said, through simple processing of gold arbitrage very subtle ways, sometimes beyond the regulatory scope of the customs, on the surface it is difficult to determine whether a false trade, which also increases the difficulty of regulation.

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