Tag Archives: Chinese banks

What Are These Huge Tonnages In “Precious Metals” On Chinese Commercial Bank Balance Sheets?

There has been much conjecture since 2014 about the increasing numbers in the “precious metals” category on the balance sheets of listed Chinese commercial banks. By the end of 2015 China’s largest banks were holding RMB 598 billion in precious metals.

Some analysts think that the precious metals on Chinese commercial bank balance sheets are gold reserves purchased on behalf of the Chinese central bank, while others surmise that Chinese banks buy gold at the Shanghai Gold Exchange (SGE) and then lend it out so the precious metals on the balance sheets solely represent leased gold. In the latter analysis it’s then assumed the leasing inflates the amount of gold withdrawn from SGE designated vaults. Most certainly there is leased gold on Chinese banks’ balance sheets, but this can hardly influence SGE withdrawals, as I have previously explained. Read this and this article for more information.

What do we know beyond the gossip about the precious metals holdings on Chinese commercial bank balance sheets?

From studying the annual reports of the respective banks and additional documentation we know the precious metals can be at least the following things (if I find more clues this post will be updated):

  1. Gold savings that belong to the banks’ customers
  2. Gold inventory for the banks’ retail gold business
  3. Gold leasing business
  4. Gold held for hedging purposes
  5. Gold held outside China
  6. Gold in Chinese ETFs.

Since the Chinese silver market was liberalized much earlier than gold I don’t think there is any edge for Chinese commercial banks to have a predominant role in the silver market. So, probably most of the precious metals on the balance sheets in question are gold related.

Below is an overview of the precious metals holdings of listed Chinese commercial banks as of 31 December 2015, measured in yuan (RMB). There are 16 listed Chinese commercial banks on China’s A-share market but Huaxia Bank didn’t disclose its precious metals holding in its annual report. If all aggregated precious metals holdings relate to gold, the upper bound is approximately 2,682 tonnes of gold.

Chinese Banks Precious Metals holdings table 2015 (inc gold)
Exhibit1. Source: Annual reports

Helpful for understanding this article is my post The Mechanics Of The Chinese Domestic Gold Market

1. Customers’ Gold Savings

A substantial amount of the precious metals reflect (fully backed) customers’ gold deposits in the form of Gold Accumulation Plans (GAP), recorded as an asset and a liability on the balance sheets of the banks. However, to me it’s unknown how much gold is exactly accumulated in China through GAPs. 

Let’s go through the annual reports of the Chinese banks having the largest precious metals holdings, seeking for information with respect to GAPs.

According to the 2015 annual report of Bank of China (BOC):

Precious metals comprise gold, silver and other precious metals. The Group retains all risks and rewards of ownership related to precious metals deposited with the Group as precious metals deposits, and it records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognized.

From the BOC website its GAP seems to be in its infancy, so I don’t expect it to comprise much gold. ICBC on the other hand, introduced a GAP in 2010 and is thought to be largest in China.

From reading ICBC’s 2015 annual report [brackets added by me]:

Seizing the opportunities arising from customers’ wealth increase and capital market growth, the Bank made efforts to establish a mega asset management business system across the whole value chain and enhance its specialized operating capabilities on the strength of the Group’s asset management, custody, pension and precious metal businesses,

The [ICBC] Group records the precious metals received as an asset. A liability to return the amount of precious metals deposited is also recognized.

On ICBC’s website we read:


According to statistics, by the end of 2014, the business size of ICBC’s GAP was more than 250 tonnes, a 150% YOY increase. GAP clients are more than 1 million.

Screen Shot 2016-08-31 at 4.06.03 pm
Screenshot from ICBC’s Ruyi Gold Accumulation Plan.

In the 2015 annual report by China Construction Bank (CCB):

While consolidating our traditionally advantageous businesses in housing finance and cost advisory service among other things, we actively expanded our presence in … precious metals.

The Bank supported product innovation, provided and optimized new products such as … gold purchase and saving.

The Bank proactively responded to changes in the precious metals market via pursuing marketing expansion, enlarging customer base and enforcing product innovation. The Bank launched innovative products and business models, including gold accumulation plan ….

To me it’s unknown how much gold CCB’s GAP comprises.

All in all, part of the precious metals on the listed Chinese commercial banks’ balance sheets are gold savings held on behalf of clients instead of reflecting the banks own metals.

(Likely, gold saved in Chinese GAPs is not stored in SGE designated vaults.)

2. Bank Gold Inventory

Chinese banks offer a wide range of retail gold investment products for sale at local branches and through internet order. Naturally, any gold inventory for this business is recorded on the balance sheets. From ICBC’s 2015 annual report:

To echo the changes in market demands, the Bank developed a variety of new brands on assorted themes and introduced a slew of products, e.g. Chinese Zodiac Coins and Panda Gold and Silver Coins, under agent sales. The Bank expanded the online channels, through which the flagship store “ICBC Gold Manager” witnessed substantial growth of sales, and it also piloted the direct distribution of logistics suiting to the characteristics of e-commerce.

ICBC gold bars
ICBC gold bars.

According to the World Gold Council roughly 60 % of Chinese retail gold investment demand is supplied through commercial banks. Consequently, Chinese banks’ own gold inventory for retail business can not be neglectable. 

Screen Shot 2016-08-30 at 10.03.27 pm
Courtesy World Gold Council. Note, “retail investment demand” excludes direct purchases at the SGE by individuals and institutions.

Additionally, I have no proof, but it can be that some of the inventory in the vaults of the SGE is appearing on the Chinese bank balance sheets. Most of the banks listed in exhibit 1 have a PBOC gold import license. Once the bullion is imported into the Chinese domestic gold market, often done through consignment, it must be sold first through the SGE. By the time it has arrived in an SGE designated vault and before it’s withdrawn, possibly it’s shown on the balance sheet of the importing bank. Though, this analysis is speculation.

3. Gold Leasing

Probably the largest share of the precious metals on the balance sheets have to do with gold leasing. At the moment, there are no official accounting rules or guidelines related to how to record bank’s gold leasing activities. (In this post, I don’t distinguish between gold leasing and gold lending because the essence is the same.) However, most banks seem to still put gold leasing activity in the precious metals category of their balance sheet. 

Helpful for the coming paragraphs is my post Chinese Commodity Financing Deals Explained (which is about the Chinese gold lease market). 

According to the A-share annual report of the Bank of Communications [brackets added by me]:


Precious metals that are not related to the Group’s trading activities including coins and medallions sales are initially measured at acquisition cost and subsequently measured at the lower of cost and net realizable value. Precious metals that are related to the Group’s trading activities including precious metals lease and [precious metals] interbank lending are initially and subsequently recognized at fair value, with changes in fair value arising from re-measurement recognized directly in profit or loss in the period in which they arise.

Apparently, the Bank Of Communications has its gold leasing business disclosed on its balance sheet in the precious metals category. 

Below is from the 2015 annual report of Shanghai Pudong Development Bank (page 17):

spdb cn


spdb en
Exhibit 2. Source Shanghai Pudong Development Bank

Shanghai Pudong Development Bank saw its precious metals holdings grow from RMB 11,707,000,000 on December 31, 2014, to RMB 28,724,000,000 on December 31, 2015. As the main cause for the growth in precious metals is considered to be “increased physical gold leases”, we must conclude in the case of Shanghai Pudong Development Bank nearly all precious metals on its balance sheet relate to gold leasing. But does this mean Chinese banks buy gold on the SGE and then lease it out? Not necessarily.

Chinese banks mainly do back-to-back gold leasing – simply connecting supply and demand. Banks don’t have much money of their own. They need to borrow money or gold either from savers or in the interbank market to make loans. Would it make sense for banks to borrow money in order to buy gold to subsequently lend out gold? Or would it be more logic for banks to borrow gold to subsequently lend out gold?

From a source who worked at the precious metals trading desk at ICBC in 2014 I was told first hand ICBC has little gold of itself for leasing, most of the gold lend out is borrowed from third parties. These third parties are mostly SGE members or overseas banks that lend gold through the Chinese OTC market. By the way, all commercial bank gold leasing is settled through the SGE system.

ICBC operates in the lease market as an intermediary by connecting supply (lessors) and demand (lessees), while striking a fee. ICBC can borrow gold from international banks or local gold owners with an SGE Bullion Account, and lend the gold to miners, jewelers or speculators. My assumption is that the international gold lease rate is lower than the Chinese gold lease rate, which attracts gold from the international market into the Chinese domestic gold market. (Whenever a gold loan is to be repaid from the Chinese domestic gold market to an international lender, not the physical metal is exported, but funds cross the Chinese border, as physical gold export is prohibited from the Chinese domestic gold market.)

Also note, if banks would buy the gold to lend out, they are exposed to the price risk of gold. In order to cover this risk, banks need to hedge but this will involve additional costs. As a result, the logical solution is for banks to do back-to-back gold leasing.

The Bank of Beijing is a good example to illustrate back-to-back gold lending. Unlike other Chinese banks, the Bank of Beijing does not put gold leasing in the precious metals category. It has a separate line in its books for gold leasing.

According to the 2015 annual report of the Bank of Beijing (page 123 and 132):

Bank Beijing 1jan
Exhibit 3.1. “Leased out” is lending. The unit is RMB million.
Bank Beijing 2jan
Exhibit 3.2. “Leased in” is borrowing. The unit is RMB million.

As readers can see from the excerpts above, the Bank of Beijing indeed does back-to-back gold leasing as precious metals “leased in” (RMB 1,400,000,000) are equal to precious metals “leased out”(RMB 1,400,000,000). I suspect most gold leasing by Chinese banks is back-to back leasing. 

Because the Bank of Beijing has its leasing business noted in a separated line than its “precious metals”, we can see a huge discrepancy between the Bank of Beijing’s precious metals holdings in exhibit 1 (RMB 55,000,000) and its back-to back leasing business in exhibit 3 (RMB 1,400,000,000).

Estimated Chinese Gold Leasing Turnover
Exhibit 4. Total yearly leasing turnover must not be commingled with the amount of gold leased out at any point in time. The latter is unknown as far as I know.

Other banks don’t have a separate line for the gold leased out but as mentioned before, they put it in the precious metals category. A widely-accepted method to treat borrowed gold is to include a liability called “financial liability at fair value through profit and loss”. Readers who can understand Chinese are recommended to click this and this link. The ICBC annual report provides an example of how the liability is recorded.

ICBC 2015 PM liability
Source: the 2015 annual report of ICBC.

In conclusion, back-to-back gold leasing will result in an asset and a liability on the banks’ balance sheets, for most banks highly overstating the precious metals category. When looking at exhibit 4 we can see the enormous growth in yearly Chinese gold leasing turnover, which must have enlarged Chinese banks’ balance sheets.  

According to my analysis a large portion of the precious metals on the balance sheets of Chinese banks is back-to-back leasing, which is nearly all gold that stays inside the SGE vaults, and thus does not impact SGE withdrawals.   

4. Hedging

China’s commercial banks offer derivatives to retail and institutional customers. Bank of China’s Qi Jin Bao is an example. Qi Jin Bao is in fact gold option business. The retail customer pays a certain amount of money (option premium) and buys a gold call option or put option.

For example (simplified): suppose the current gold price is $1300/oz and a retail customer is bullish on gold and believes that the gold price will rise in 3 months time. Therefore, the retail customer buys a 3 months call option with a notional amount of 100 oz of gold at the strike price of $1300/oz from Bank of China and pays an option premium of $35/oz. If the gold price indeed goes up in 3 month’s time, the retail customer will make money. However, derivatives are a zero-sum game. If the retail customer makes money, then the Bank of China definitely loses money. If the gold price goes up to $2000/oz, Bank of China will lose big time. In order to mitigate this risk, Bank of China will (borrow money to) buy gold to hedge the short call position and the gold purchased will appear on the balance sheet.

5. Gold Held Outside China

Gold on the balance sheets of Chinese commercial banks doesn’t necessarily have to be gold held in China. Chinese banks like ICBC, BOC and Bank of Communications have direct access to the LBMA. As a result, gold on the balance sheets of Chinese commercial banks can be located outside China mainland.

On January 29, 2014, ICBC bought 60 % of the existing shares in Standard Bank Plc from Standard Bank London Holdings Limited. After completion of the acquisition, Standard Bank Plc was renamed as ICBC Standard Bank on 27 March 2015. In the 2015 annual report of ICBC (Group), which includes ICBC Standard Bank data, we see that ICBC Standard Bank held RMB 18,426,000,000 in precious metals assets (equivalent to 83 tonnes of gold) on December 31, 2015.

Screen Shot 2016-09-01 at 11.15.03 am
Source: the 2015 annual report of ICBC.

As ICBC Standard Bank can be seen as the international gold arm of its group – ICBC Standard Bank is a London Bullion Market Association market maker for spot trading and a clearing member of London Precious Metal Clearing Limited (LPMCL) – we may assume any precious metals assets of ICBC Standard Bank are not located in China mainland. 

6. Gold in Chinese ETFs

Currently there are 4 Chinese gold ETFs. Namely,

  1. - Bosera Gold ETF (custodian, Bank Of China)
  2. - Guotai Gold ETF (custodian, Industrial and Commercial Bank of China)
  3. - Huaán Yifu Gold ETF (custodian, China Construction Bank)
  4. - Efund Gold ETF (custodian, Industrial and Commercial Bank of China)
Exhibit 5. As of August 2016 the physical holdings in Chinese gold ETFs are 35 tonnes.

According to the prospectuses of all 4 ETFs the physical gold holdings of these ETFs must be stored within SGE designated vaults. Without a doubt the physical holdings in each gold ETF appear on the bank balance sheets of the custodian banks. For more information read China’s Rising Gold ETF Market: A Hybrid.


From the descriptions above, the precious metals holdings on the balance sheets of Chinese commercial banks are quite complicated to decipher. One thing is for sure, it’s not all gold owned by banks and leased out, neither is it all purchased by banks on behalf of the Chinese central bank.

In order for us to learn more exactly what the precious metals on the balance sheets represent we need more information, more investigation is needed by gold analysts. Hopefully this blogpost can serve as a springboard to a better collective understanding.


In addition to Gold Accumulation Plans many Chinese banks offer a variety of (paper) gold hedging and speculation broker services to their clients. For example, in the annual report 2014 from Agricultural Bank of China (ABC) we can read:

… Precious metals

… As a major precious metal market maker in the PRC, the Bank provided customers with precious metal trading, investment and hedging services through … trading of precious metal derivatives … and trading … the Shanghai Futures Exchange and the London precious metals market.

So, through ABC clients can trade paper gold, but these derivatives would be recorded off-balance sheet, or in a separate line next to “precious metals”. More from the ABC annual report 2014:

Our off-balance sheet items primarily include derivative financial instruments, contingent liabilities and commitments. We enter into currency rate, interest rate and precious metals related derivative financial instruments for the purposes of trading, asset and liability management and business on behalf of customer.

Similarly, in BOC’s annual report 2015 we read:

Off-balance Sheet Items

Off-balance sheet items include derivative financial instruments, …. The Group entered into various derivative financial instruments relating to … precious metals and other commodities for trading, hedging, asset and liability management and on behalf of customers. 

Implying, from my judgement, all the precious metals on-balance sheet are not (customers’) paper gold. 

Chinese Gold Leasing: Hidden Danger

I got this article from a source in the mainland.

In short, some enterprises in China use gold leasing from banks to solve their short-term funding problems in the hope of buying back the gold at lower levels to repay the lease. However they can be short-squeezed when gold moves higher. My source was so kind to do a quick translation for us (the west):


bulls vs bears china gold leasing


The Gold Bear Market Game: Spread Arbitrage Through Gold Leasing For Individuals

January 20, 2014

By Chen Zhi, Shanghai

It’s Spring Festival time again. A private business owner Chen Qian (Alias) is unhappy with her own investment impulse.

At the beginning of January, she got the 11 million RMB from a due trust product and she wanted to use it as the cushion to pay for the bills for procurement. 2 weeks later, because she couldn’t resist the temptation of a real estate trust product with an annualized rate of 11%, she put her money into this product.

To her surprise, because another sum of sales proceeds was said to be delayed, she now needed some money to pay for business procurement.

In fact, this is not her first time to be in a shortage of funds. In the past, she could pledge trust products at banks to apply for short-term bridge loans. This year, she was told banks didn’t have enough lending capacity so the bridge loan was impossible.

Therefore, she had to try the gold lease business.

Gold lease is like this: eligible businesses can lease gold from banks and pay the same quantity and grade gold when the gold lease is due and pay the relevant gold lease rate. During the lease, businesses can sell the gold to get short-term funding.

However, to her surprise, gold lease is not only a new financing tool but many business owners use it as a modern arbitrage means.

“Among my friends, there are business owners investing tens of millions of RMB and play the gold lease risk-free spread arbitrage.” Chen Qian said. But in her opinion, this kind of risk free arbitrage may have unfathomable risks.

6.7 % Funding Cost: The Involvement Of Individuals

Chen Qian’s first experience with gold lease is from the recommendation of a jewelry manufacturer.

In the past, through gold lease, this jewelry manufacturer could easily get tens of millions yuan of “cheap”funds, even in the time of credit crunch, which made her jealous.

It works like this: the jewellery manufacturer first leases 33kg of gold from a bank and then sells it through the Shanghai Gold Exchange to get around 10 million yuan (at 303 yuan/gram). Then he uses 1.5 million (15% margin rate) to buy 33 kg of gold futures contracts and use the 8.5 million left for the short-term funding of businesses.

Because the finance expenses including the gold lease expense, the brokerage fee for the futures contract are less than 0.55 million yuan, then the effective cost for the gold lease is close to 6.7 %. At the same time, the total finance expenses for bank loans (including loan rate, to cost to buy wealth management products, business audits, etc) are more than 9 %.

But not all businesses are qualified for gold lease as a means to get low rate loans. Chen Qian’s first application for gold lease was turned down. The reason is banks only lease gold to companies involved in gold market, including gold production, fabrication, sales and trade. Gold lease is not available for high net worth individuals.

Under the guide of the jewellery manufacturer, Chen Qian found that high net worth individuals can circumvent rules to get gold lease contracts. Way No. 1: set up an enterprise related to gold business. One only needs to put the phrase “gold jewellery business” into the business license to satisfy the internal compliance needs of banks. Way No 2: use the “tunnel” provided by financial lease companies and gold fabricators. One just needs to ask them to lease gold from banks to re-lease to individuals.

In her opinion, her enterprise’s internal credit rating in banks is B+ and has enough credit limit and funds so leasing gold is simple.

“Some bank insiders say, gold lease is an off-sheet lease activity. When authorities are putting tight controls on on-sheet lending, this kind of off-sheet lease business is flexible” Chen Qian said. The biggest flexibility in her opinion is lack of generalised pricing standards.

At the moment, ICBC, CCB, SPDB, BOC etc all have gold lease businesses. The 3 banks Chen met had the following rates: the lowest 3.5 %, highest 4.2 % and one is 3.8 %

“The pricing (of the lease) is related to banks’ internal pricing of risks” a person working at a Bank’s precious metals dept. This is related to the bank’s cost to deal with future gold volatility, the cost for physical delivery etc. But he emphasized that to prevent enterprises and individuals to use gold lease to get funds for speculation, most banks don’t allow non-gold related enterprises to get involved.

Every rule has loopholes. Chen found in casual chat that gold lease has become a fashionable spread arbitrage game among the enterprise owners around.

Picking Pennies In Front Of A Bulldozer Through Spread Arbitrage.

Spread arbitrage is like this: these business owners, in the background of gold’s 28% pullback in 2013, remain bearish on gold. They “borrow”gold through different ways and sell the gold on the SGE for funds. They hope to buy back the same amount of gold to repay and get the spread when gold falls further to their targets in 2014.

“A business owner signed a 3-month gold lease agreement at the end of last year and sold the gold at $1300/oz. He said he would buy back and return the gold when gold fell to $1150/oz in Q1 2014 and pocket the $150/oz difference.” Chen said. This business owner used tens of thousands of yuan. Because banks had many limitation on gold lease targets, he chose to lease physical gold from gold producers/merchants.

Gold merchants have a lot of physical gold in hand and this gold has no interest. So they would rather lease out the gold for a return.

This method is similar to banks’ gold lease. It needs business owners to put a certain percentage as margin and use real estate as pledge. During the lease, the hedge in the gold futures agreement must be done through the gold merchant’s account to control gold price volatility. But if the gold’s fall is far less than business owner’s target price to buy back the gold at the beginning of the lease, the business owner has to meet margin calls or even suffer losses.

“Gold lease is usually shorter than 1 year because the shortage the tenor, the easier to control price volatility.” The person working at the Bank’s precious metals department said. But there are some radical rich investors.

Recently, some rich people even use the funds through gold lease to invest in high yield real estate trust products to achieve “getting something from nothing”. The spread between the yield on trust products and gold lease rate is risk free in their eyes.

“Is it really risk free?” Chen was suspicious. On the one hand, many real estate investment products are facing default risks and on the other, gold lease arbitrage is facing the volatility of gold price. If these 2 risks occur at the same time, this seemingly risk-free arbitrage could be in fact “picking pennies in front of a bulldozer.”