Chinese gold imports could fall by up to 400 tonnes this year as the government tightens controls on gold financing deals and domestic demand softens, a leading precious metals consultant said on Thursday.
Philip Klapwijk, director of the Hong Kong-based Precious Metals Insights, said the Chinese authorities are once again moving to rein in abuse of gold lending, after a crackdown on commodity financing last year.
He said weaker import volumes in recent months -- China's gold imports from Hong Kong dropped in May to the lowest level since January last year -- suggested the gold lending business was already being partly wound down.
In the full year, imports could fall 300-400 tonnes, or as much as 22 percent, he said.
"(Gold imports) will probably decline for the full year given the impact of firstly, weaker real demand in China compared to its outstanding level in 2013 and secondly, measures to restrict the abuse of gold lending and other financial plays using the yellow metal," he said in an interview with the Reuters Global Gold Forum on Thursday.
"Total imports into China may have reached nearly 1,800 tonnes in 2013, taking into account unofficial and direct shipments," he said. "That figure will surely be several hundred tonnes lower in 2014.... It is another headwind for any rally in gold this year, and it also means the price floor may be a bit shakier."
Gold pricesare up nearly 10 percent this year after falling in 2013 for the first time in more than a decade, but remain more than 30 percent below 2011's record highs.
A report from the World Gold Council earlier this year, based on research by Klapwijk, said gold imported into China was being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation.
It estimated that up to 1,000 tonnes of gold, worth about $42 billion at current prices, could be tied up in these transactions.
"In short you have in China a very large 'surplus' of gold
-- cumulatively over 2,000 tonnes in the last 4 years -- that can mostly only be explained by either private sector financial use of gold or official purchases," Klapwijk told the Forum.
"It is impossible to be sure of the split between these two main semi-hidden sources of demand, but both would be large, in my view."
China's chief auditor said last week Chinese gold processing firms have since 2012 used falsified gold transactions to borrow 94.4 billion yuan ($15.2 billion) from banks.
While affirming that a drop in Chinese gold imports could prove a drag on price, Klapwijk played down the impact of a large-scale unwinding of Chinese gold financing deals on international prices.
He said however that it could reverse the flow of physical gold, which has moved from west to east in recent years as gold stored to back exchange-traded funds in London and New York was shipped east to meet Chinese demand after investors sold ETFs.
"Given that nearly all of these gold trades are hedged in the futures market, there should be no net effect on the price if they are unwound," he said.
"However, there could be an impact on the contango (discount for immediate delivery) and also on the physical premium or discount loco (located in) China or Hong Kong versus the rest of the world.
He said the premium could potentially fall significantly, adding: "If the discount grows sufficiently then there will be pressure to export material from China to Hong Kong and then back to Europe, reversing in fact some of the financially-driven flows seen between 2011-13."
Source: Reuters
Philip Klapwijk, director of the Hong Kong-based Precious Metals Insights, said the Chinese authorities are once again moving to rein in abuse of gold lending, after a crackdown on commodity financing last year.
He said weaker import volumes in recent months -- China's gold imports from Hong Kong dropped in May to the lowest level since January last year -- suggested the gold lending business was already being partly wound down.
In the full year, imports could fall 300-400 tonnes, or as much as 22 percent, he said.
"(Gold imports) will probably decline for the full year given the impact of firstly, weaker real demand in China compared to its outstanding level in 2013 and secondly, measures to restrict the abuse of gold lending and other financial plays using the yellow metal," he said in an interview with the Reuters Global Gold Forum on Thursday.
"Total imports into China may have reached nearly 1,800 tonnes in 2013, taking into account unofficial and direct shipments," he said. "That figure will surely be several hundred tonnes lower in 2014.... It is another headwind for any rally in gold this year, and it also means the price floor may be a bit shakier."
Gold prices
A report from the World Gold Council earlier this year, based on research by Klapwijk, said gold imported into China was being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation.
It estimated that up to 1,000 tonnes of gold, worth about $42 billion at current prices, could be tied up in these transactions.
"In short you have in China a very large 'surplus' of gold
-- cumulatively over 2,000 tonnes in the last 4 years -- that can mostly only be explained by either private sector financial use of gold or official purchases," Klapwijk told the Forum.
"It is impossible to be sure of the split between these two main semi-hidden sources of demand, but both would be large, in my view."
China's chief auditor said last week Chinese gold processing firms have since 2012 used falsified gold transactions to borrow 94.4 billion yuan ($15.2 billion) from banks.
While affirming that a drop in Chinese gold imports could prove a drag on price, Klapwijk played down the impact of a large-scale unwinding of Chinese gold financing deals on international prices.
He said however that it could reverse the flow of physical gold, which has moved from west to east in recent years as gold stored to back exchange-traded funds in London and New York was shipped east to meet Chinese demand after investors sold ETFs.
"Given that nearly all of these gold trades are hedged in the futures market, there should be no net effect on the price if they are unwound," he said.
"However, there could be an impact on the contango (discount for immediate delivery) and also on the physical premium or discount loco (located in) China or Hong Kong versus the rest of the world.
He said the premium could potentially fall significantly, adding: "If the discount grows sufficiently then there will be pressure to export material from China to Hong Kong and then back to Europe, reversing in fact some of the financially-driven flows seen between 2011-13."
