Banks add to metals hoard to meet leasing demand

The value of precious metals held by China's biggest lenders surged 66 percent year-on-year during the first half as banks leased more gold to customers to get around rules that made it harder to lend cash.

Precious metals held by Industrial & Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd and Bank of China Ltd, the country's four biggest lenders, were worth 378 billion yuan ($62 billion) as of June 30, according to their financial reports.

The growth rate outpaced the gain in benchmark bullion prices, which rose 7.5 percent.

China is seeking to rein in credit by raising borrowing costs and cutting off lending to sectors considered at risk of default amid a property slump and rising number of bad loans. Those forces are prompting banks to hold more precious metals as they expand their gold-leasing business, which is not subject to loan caps and is considered off-balance sheet lending, according to Industrial Bank Co.

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"Gold-based financing has grown a lot in the past year," Duan Shihua, a partner at Shanghai Leading Investment Management Co, said by phone from Shanghai on Friday. "It's clear from banks' statistics that lots of companies in China still can't get enough financing."

Precious metals assets at banks are valued against the Shanghai Gold Exchange prices on the final day of the reporting period and most of the banks' holdings are in gold, Jiang Shu, a senior analyst at Industrial Bank Co, said by phone from Shanghai.

The lenders' holdings were the equivalent of about 1,445 metric tons of gold, based on June 30 prices, up 55 percent from a year earlier. That was more than the 1,054 tons that China's central bank was holding in its reserves, according to World Gold Council data.

Bullion of 99.99 percent purity, the benchmark spot contract on the Shanghai Gold Exchange, was at 261.86 yuan per gram on June 30, compared with 243.50 yuan a year earlier. It traded at 252.80 yuan late on Tuesday afternoon.

The value of precious metals held by ICBC more than doubled to 91 billion yuan over the period, according to its financial statements. That was the equivalent of about 347 tons of gold, based on June 30 prices, up from about 158 tons a year earlier.

ICBC had rapid growth in both its precious metals leasing business and a gold accumulation program whereby individuals put aside a fixed sum of money each month to buy bullion, the company said in its earnings release on Thursday.

There are two types of gold leasing deals. In the first, a customer borrows the metal from the bank and simultaneously enters a forward agreement to hedge price risks, according to ICBC's website. That allows the company to obtain cheaper credit because the lending fee is lower than the interest rate of a loan of the same tenure.

In physical leasing, the customer in a gold-related industry borrows the metal for business needs and repays it at the end of the lease period, according to the bank's website.

China Construction Bank, the country's second-largest lender, held 51 billion yuan worth of precious metals as of June 30, the equivalent of about 194 tons of gold. That compared with 33 billion yuan a year earlier, according to its second-quarter financial report, or 137 tons of gold.

Agricultural Bank of China, the country's third-largest lender, held 21 billion yuan worth of precious metals as of June 30, the equivalent of about 81 tons of gold. That compared with 17 billion yuan, or 70 tons of gold, a year earlier, according to its second-quarter financial report.

Bank of China's holdings of precious metals stood at 215 billion yuan at the end of June, or the equivalent of about 823 tons of gold, compared with 570 tons a year earlier, financial data show.

The nation's gold consumption plunged 52 percent to 192.5 tons in the second quarter from a year earlier as buyers purchased fewer bars, coins and jewelry amid a clampdown on corruption, the World Gold Council said on Aug 14.

As much as 1,000 tons of gold may have been used in financing deals in China, the WGC said in April.

Investigations into the fraudulent use of raw materials as collateral for loans may also reduce demand for precious-metals leasing, according to Liu Xu, a Beijing-based analyst at Capital Futures Co. Banks are increasing scrutinizing commodities financing as public security officials probe whether copper and aluminum were pledged as collateral multiple times at the port of Qingdao.