Koos Jansen
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Koos Jansen
Posted on 11 Dec 2014 by

Gold Chat About The Chinese Gold Lease Market

As some of you may have noticed Bron Suchecki, manager at the Perth Mint and publisher of the Goldchat blog, wrote a critical article about my recent post on the Chinese gold lease market.

Firstly I would like to thank him for the work he does writing critical articles on blogs in the gold space that have lost touch with reality. From my point of view there is a lot of misleading information out there, if it wasn’t for people like him there would be even more presumably. It’s valuable to have industry professionals participate in blogging to get all angles of the market, which is often displayed as black or white. Bron’s article made me rethink the key takeaway of my initial post and led to more thorough research.

Bron and I had email correspondence today, as we do occasionally on all sorts of subjects, and we agreed it would be best for the debate to respond in a new post for me, so all my readers become notified of my opinion on Bron’s post.

As I have already stated in the comment section on his blog, I didn’t agree with Bron’s Winklebottom point of view, which can distort the perception of his content and turns his writing into a black post. If I ignore his approach I can reply on the content:

1) While twisting a bit Bron suggests the PBOC might manipulate the price of gold through gold leasing. From his article [brackets added by me]:

However, in some sense my headline [PBOC paper recommends leasing its reserves to manipulate gold price] is true, although not that PBOC is explicitly short selling gold. In the paper they recommend that “enterprise participants can be left to commercial banks to be evaluated for risk of doing business, not unlike evaluating business loans.” In other words, you can trust the banks to be prudent in choosing who to lend gold to. Subsequent events indicate that Chinese banks weren’t so prudent, the result being “bad” leasing for short selling.

His headline is not true in my opinion, because the Chinese gold market is in the process of opening up, but gold export (in general trade) is still prohibited in China.

2) I agree with Bron in the Chinese gold market there is also “bad” leasing, as I described in the third simplified example in the introduction of  my post (including a link to my article from January 21 explaining these practices in China). More on this later.

3) In the sixth paragraph of his post he states Chinese gold leasing involves round tripping. While leasing and round tripping can be both categorized as Chinese Commodity Financing Deals (CCFD), they are two completely different procedures. I’ve written extensively about this in Chinese Gold Trade Rules And Financing Deals Explained. This post clearly explains round tripping has got nothing to do with the Chinese domestic gold market (the SGE) or with the Chinese gold leasing, as the latter is always done through the SGE. However, Bron entangles leasing with round tripping, leading to incorrect conclusions.

4) Moving on to the most important part of the discussion; is leased gold double counted in China? On SGE level certainly not, on balance sheets it can be; I edited my previous post on this subject as it was inaccurate in the way presented at first.

After reading Bron’s post I read some more bank documents, had a interesting phone call with ICBC’s precious metals trading desk and emailed with my regular sources in the mainland. There’s always much more to learn when continuing to dig deeper. At this stage this is what I know and what I don’t know:

It’s clear all leases are done through the SGE where there can be no double counting (either you have gold in your SGE Bullion Account or not). The lessor and lessee are both required to have an SGE account. What I don’t know is how all parties involved disclose the transactions on their balance sheet. Let’s look at some examples of lease procedures.

The ICBC precious metals trader I spoke to told me ICBC has little gold of itself to be leased, most of their leased gold is used from third parties. These parties are either SGE members, such as refineries, or overseas banks that supply gold through the Chinese OTC market. He didn’t know how his lease trades were processed by ICBC’s accountants. I’ll try to call the accountants, though I’ve been warned they might not speak English.

Another source in mainland China wrote me:

The wholesale OTC gold market in China is done through SGE accounts. The two parties negotiate off the SGE (usually through the CFETS – China Foreign Exchange Trade System) but gold is settled through SGE accounts.

While speaking to the ICBC employee I passingly discussed the possibilities for BullionStar to open a Shanghai International Gold Exchange (SGEI) account. Through this account BullionStar could trade physical gold in the Shanghai Free Trade Zone (FTZ), with the option to export, or trade gold in the mainland, without having the option to export. (read this post for the workings of the SGEI). If BullionStar would have gold credited to its SGEI account in the mainland we would have the option to lease it through ICBC, I was told.

Are there more ways for ICBC to source gold for leasing? Maybe.

Any Chinese citizen can walk into an ICBC branch to open a personal SGE account through ICBC as its broker (this is one of the precious metals products ICBC offers to customers). However, gold that is credited to a personal SGE account is impossible for ICBC to use at its own discretion for leasing.

Another ICBC gold product is Ruyi Gold. Through this product customers can save at the bank (or withdrawal) Ruyi bank bars, which are not standard SGE gold bars. For this reason Ruyi Gold deposits are also impossible for ICBC to touch for leasing.

Screen Shot 2014-12-11 at 12.47.21 AM
ICBC’s considerations for Ruyi Gold.

Than there is ICBC’s Gold Accumulation Plan, “launched by ICBC partnered with the World Gold Council”. No SGE account is required for the Gold Accumulation Plan. From ICBC:

The Gold Accumulation Plan is a service for customers who open Gold Accumulation Plan accounts at ICBC and sign the accumulation agreement to buy ICBC gold asset equity in regular periods…

Though I have no hard evidence, the Gold Accumulation Plan smells a bit like unallocated gold. Possibly ICBC might use a fraction of the Accumulation Plan gold pool to lease (pure speculation!).


What stood out for me after additional research was that ICBC, and perhaps the other Chinese banks involved in leasing as well, is mainly an intermediary that facilitates between lessor and lessee, while striking a fee on all transactions. Consequently I think every lease (ex fee) would increase ICBC’s assets and liabilities by the same amount on their balance sheet. How the actual lessor and lessee handle their balance sheet I don’t know. Maybe Bron would knows more, if I recall correctly he has a background in accounting.

There is a lot more to learn on this topic that I surely will publish in forthcoming posts. Anybody how has additional sources, further data, or a different interpretation, please feel free to comment below.

Koos Jansen
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  • Spartacus Rex

    Excellent follow up Koos. Great work.
    Also, what do you think will be the biggest impact with HK Gold Exchange members doing business in Shanghai? Thanks.
    Cheers, S. Rex

    • KoosJansen

      I expect at this stage it will be similar to the SGEI in Shanghai FTZ. The CGSE vault that is being build is located the Shenzhen FTZ. Note to structure of the Chinese gold market.

  • The_Spanish_Inquisition

    Koos – and by implication Bron – this is fascinating work, but surely akin to investigating how many Angels could fit on the head of a pin.

    Irrespective of the true answer to the riddle of the Chinese Gold Market – if there is just one answer – the question is surely “So what?”

    I do not raise this point confrontationally as a way of undermining or in any way challenging the integrity and diligence of your research, but simply to question what point you are trying to make. Firstly – and I sense that you two Gentlemen are perhaps crystal clear about this in your own minds – many writers (and readers) continue to conflate “China” with “The Chinese”. The PBOC is, quite frankly, a bit-part player in the domestic Precious Metals sector, and although central government policy is no doubt applied quite differently in China than in the West (see Bron’s recent blogs), it is an easy assumption for the layman to make (and for the unscrupulous to encourage) that the Chinese operate en bloc in accordance with some centralised edict, and that the PBOC has some Master Plan which is driving it all. Personally, I find this more than slightly naïve

    Whatever the truth of the matter – whether Chinese accountants do / do not double count lease assets, whether SGE deliveries are/are not equivalent to the physical (rather than legal) transfer of physical metal, whether aggregate Chinese hoarding is/is not increasing, whether ICBC “Gold Equity” is/is not “paper Gold” – what is the consequence? With respect, very little – because whilst the macroeconomic interventions of the PBOC may very well be deliberate and targeted at any number of outcomes (providing liquidity to manufacturers and jewellers, suppressing the market price of Gold, rebalancing its Reserve Asset portfolio) the simple fact is that these initiatives are of no relevance to either the commercial Banks such as ICBC who market retail Gold investment schemes, nor their customers who invest in them.

    Perhaps a more relevant graphical analysis for Bron to dredge up from Sharelynx would be to plot SGE Gold Deliveries against either Chinese domestic RPI, or vs Guangdong/Zhejiang Manufacturing Wages (as a proxy for the emergence of a Middle Class with disposable income available for discretionary investment).

    The Chinese are not a homogenous monolithic hive of drone-like automata, and neither is “China” a homogenous construct; certainly, to conflate “Chinese Gold Demand” with PBOC macroeconomic policy (or with “Communist Geopolitical Strategy”) is absurd, and instead of trying to speculate about which of the myriad motivations and contributing factors are currently uppermost in the diverse psyche’s of investors who have little more in common than that they happen to be based in China, it might be more profitable to consider what the possible consequences of any trend or shift in emphasis/incentive might be.

    As an example – IF the PBOC is or was successful in supplying liquidity to the domestic market, what impact might/would that have on overall investment demand and investment psychology? IF the PBOC declared that it has [insert large number here] tonnes of Gold, what impact might that have on a) the Renminbi b) the overall appetite of domestic Chinese investors to acquire and to hoard additional amounts of Precious Metals c) the spot price? It’s not simple, is it, because as we are seeing with Russia right now, once the Central Bank has accumulated Gold with the intention of supporting its currency, the next thing it has to do is to Sell it in order to achieve this policy objective: net net, therefore, a Central Bank accumulating Gold is not in and of itself necessarily a benign indicator of future price trajectory.

    In brief – I think you are missing the point or – perhaps more brutally – I think you are wasting your time trying to unravel the wrong question: to my mind it’s not about what is causing movements in the various segments of the Chinese domestic market, aggregate “Chinese” demand, or Global precious metal flows (or why), but what the consequences of any particular outcome might be

    • KoosJansen

      Andrew, long time. You’re making a lot of points.

      The main thing I’m interested in, and researched, is the workings of the Chinese gold market (with the SGE at its core as a homogenous construct). By knowing more precise more segments of this market we can better understand where the phyz flowing into China ends up and then possibly understand what the consequences of any particular outcome might be.

    • http://www.ukip.org/index/ George Smiley (deceased)

      You grew up as a Hongkong Chinese in London, were I right, or shall I say “Zhanglan”?!

      • The_Spanish_Inquisition

        100% Caucasian, currently in Copenhagen, and why is my ethnicity of any relevance?

        • http://www.ukip.org/index/ George Smiley (deceased)

          Not such as a Caucasian on this side of the Pond. Are you English or not?!

          • http://www.ukip.org/index/ George Smiley (deceased)

            Are you mentally ill, as in being a schizophrenic? Because I think you are, and it takes one to know one! When is your “next appointment” “over in Camberwell”?! And I think that you actually live a housing estate near Wimbledon!

            Because don’t tell me that you are mentally ill, but are in Holland or in Denmark instead on a British passport and an expired (no longer valid after the first 3 months of your stay, you know that!) EHIC card!

          • The_Spanish_Inquisition

            what a sad little troll you are

          • http://www.ukip.org/index/ George Smiley (deceased)
          • http://www.ukip.org/index/ George Smiley (deceased)

            You would never be able to beat the old and true master!


          • http://www.ukip.org/index/ George Smiley (deceased)

            There is no point in engaging a serious conversation with someone, who, although obviously educated, has the emotion of a 14-year-old teenager despite being anatomically a fully-grown adult at least in his early 30s now. Look, mate, “Thank you” are TWO words, in the plural; you start your sentence with a capital letter; and you end your sentence with a punctuation mark, geddit?!

            I pity your poor mother!

          • KoosJansen

            I would like to ask you to keep your tone civilized on this blog.

    • http://www.ukip.org/index/ George Smiley (deceased)

      For those who are not an angry Hongkong Chinese immigrant living in London (and thinks that Queen Victoria enslaved the Chinese in London for the last 5,000 years!), “the Chinese” means “China”, and nothing more.

  • http://goldchat.blogspot.com/ Bron Suchecki

    “Chinese gold leasing would be lowering the price of gold in China this would not have any influence on the global price of gold, as the spread can’t be arbitraged”

    Yes you can’t export, but any short selling going on in China will reduce the domestic price, resulting in lower premiums that importers can obtain. This indirectly affects supply outside China. For example, as the kilobar premium drops in China and importers stop buying Perth Mint’s refinery output, we would have to find other markets or in worse case, just make 400oz bars and send them to London. That increased supply/dumping will push down international prices.

    “he states Chinese gold leasing involves round tripping … Chinese gold leasing, as the latter is always done through the SGE”

    I think you’ve missed my point, which is that any gold tied up in whatever scheme, be that round tripping or legitimate manufacturing, will ultimately result in leasing demand to fund that inventory. Any increase in domestic Chinese leasing supply will push down lease rates and therefore reduce the financing costs of any round tripping or other scheme, making it more attractive and increasing the amount of such schemes. Certainly there are many other costs involved and leasing is not the major driver, but it is a factor.

    “(gold leasing through the SGE) would exclude round tripping”

    Given the SGE is just being used to settle the origination of a lease, the lessee then withdraws the gold and use it in their legitimate business to make jewellery. It is entirely possible that a lessee could withdraw gold for use it in their illegitimate round tripping or other business scheme. The SGE is just an exchange and settlement provider and does not control or restrict, as I understand it, what gold enterprises do with their either bought or leased gold. As such I don’t think you can say that any SGE withdrawal figures are only used for legitimate purposes.

    “the Gold Accumulation Plan smells a bit like unallocated gold”

    I think it absolutely unallocated gold, if they are not bound to hold physical gold (either in SGE vaults or their own) against the account then it is unallocated. Whether banks use this to lend out can be determined by whether they charge a storage or similar fee, or whether it is fee free. If the latter than the bank has a strong incentive to lend it out otherwise they will be paying storage fees but receiving no revenue.

    • KoosJansen

      1) I think this chart shows the lower the price of gold in China the more they buy and thus import.

    • KoosJansen

      2) This chart shows if price of gold in China goes down the premiums on the SGE go up (relative to London).

      • http://goldchat.blogspot.com/ Bron Suchecki

        Interesting, there are some periods of negative correlation but also periods without. Can you do a moving correlation, say 3 month period. It would be interesting to see at what times the correlation didn’t hold and see if there were other events going on at those times.
        My point about leasing wasn’t that it was a big driver, but it is there behind the scenes making an impact and we might be able to “see” it when other factors are weaker.

        • KoosJansen

          What’s a moving correlation? Moving average???

          • http://goldchat.blogspot.com/ Bron Suchecki

            Yeah like a moving average, you just have a moving period for the correlation. Doing this shows how correlations change over time.

          • KoosJansen

            Here you go… The inverse relation is clear (since 2011)

    • KoosJansen

      3) regarding round tripping.

      If gold gold is round tripped this gold is completely separated from the Domestic Chinese gold market and the SGE system. Round tripping is done under processing trade . Gold withdrawn from the SGE can not be round tripped, because it’s not allowed to be exported.

      It is not allowed to bring gold from the Chinese domestic gold market into a FTZ to round trip. Gold from the domestic gold market brought into a FTZ is the same as exporting, it’s not allowed.

      Gold imported for the SGE is imported by banks that don’t round trip.

      • http://goldchat.blogspot.com/ Bron Suchecki

        Not sure I understand how it can be stopped. Jewellery manufacturer gets bars ex SGE either by buying or leasing, melts it down and turns it into cheap jewellery and exports it. How could anyone know exactly where the gold in the jewellery was sourced from?

        • KoosJansen

          In processing trade the gold is always imported into a FTZ, the gold can’t be sourced from the SGE.

          From GS:

          …Chinese gold financing deals are processed in a different way compared with copper financing deals, though both are aimed at facilitating low cost foreign capital inflow to China. Specifically, gold financing deals involve the physical import of gold and export of gold semi-fabricated products to bring the FX into China; as a result, China’s trade data does reflect, at least partially, the scale of China gold financing deals. In contrast, Chinese copper financing deals do not need to physically move the physical copper in and out of China, so it is not shown in trade data published by China customs.


    • KoosJansen

      4) Gold Accumulation Plan is unallocated gold. Agree. Probably the same as this “paper gold” accounts from ICBC.


  • Steve Geldof

    Dear Koos, which are in your stated opinion “blogs in the gold space that have lost touch with reality.”? Thnx.

    • KoosJansen

      I highly encourage you to make up your mind about this. (hint: the ones that add sources and don’t perpetually scream the world is gonna explode tomorrow, always are a bit more credible IMVHO)

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