Tag Archives: Chinese commodity financing deals

The Official Chinese Gold Trade Rules By The PBOC

Because inaccurate information regarding the Chinese gold market keeps circulating in the international gold community BullionStar has decided to translate the Measures for the Import and Export of Gold and Gold Products drafted in March 2015 by the People’s Bank Of China (PBOC). The translation, which can be read below, will serve as a foundation to further expand on CCFDs and investigate the discrepancy between SGE withdrawals and Chinese consumer gold demand. In a forthcoming post I will expand in detail on the Measures for the Import and Export of Gold and Gold Products combined with additional Chinese trade laws, to elucidate how these rules relate to the physical gold flows involved in round tripping. A second succeeding post will be dedicated to the physical gold flows inside the Chinese domestic gold market – through the SGE – and how these relate to gold leasing.

You can download the original Chinese Measures for the Import and Export of Gold and Gold Products from the PBOC here. Be advised the Measures for the Import and Export of Gold and Gold Products can be confusing if not connected to Chinese trade rules in general.

In the translation below reference is being made to:

  1. Annex 1, Import and Export License of the People’s Bank of China for Gold and Gold Products, of which is a translation can be viewed here.
  2. Annex 2, Application Form for Import and Export of Gold and Gold Product, of which a translation can be viewed here.
  3. Catalogue for the Regulation of the Import and Export of Gold and Gold Products, of which a translation can be viewed here.
PBOC gold 3
Courtesy PBOC

Measures for the Import and Export of Gold and Gold Products

Order of General Administration of Customs and People’s Bank of China

Order No. 12015

Measures for the Import and Export of Gold and Gold Products is prepared by People’s Bank of China and General Administration of Customs based on Law of the People’s Republic of China on the People’s Bank of China, Customs Law of the People’s Republic of China and Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to be Retained.

The Measured is issued hereby and shall take effect since April 1, 2015.

Measures for the Import and Export of Gold and Gold Products

Article 1 The Measure is prepared to regulate the imports and exports of gold and gold product and to enhance the import and export management of gold and gold product based on laws like Law of the People’s Republic of China on the People’s Bank of China, Customs Law of the People’s Republic of China and Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary to be Retained etc.

Article 2 For the purpose of these Measures, gold means gold unwrought and gold products mean semi-finished gold and finished products of gold.

Article 3 The People’s Bank of China, as the authority in charge of the import and export of gold and gold products, implements a permit system for the import and export of gold and gold products.

The People’s Bank of China, based on the needs of national macroeconomic regulation and control, may conduct restrictive approval for the import and export volume of gold and gold products.

For the import and export customs clearance of gold and gold products as included in the Catalogue for the Regulation of the Import and Export of Gold and Gold Products, the Import and Export License of the People’s Bank of China for Gold and Gold Products (Annex 1) issued by the People’s Bank of China or a People’s Bank of China branch shall be submitted to the Customs.

The People’s Bank of China shall, in conjunction with the General Administration of Customs, formulate, adjust, and issue the Catalogue for the Regulation of the Import and Export of Gold and Gold Products.

Article 4 A legal person or another organization importing and exporting gold and gold products by the following trade modes shall obtain an Import and Export License of the People’s Bank of China for Gold and Gold Products in accordance with these Measures:

(I) General trade;

(II) Processing trade for the domestic market and gold products exported under processing trade with gold raw materials purchased within the territory of China; and

(III) Import and export between areas under special customs supervision or supervised bonded places and overseas areas.

An individual, a legal person or any other organization donating imported gold and gold products for public interest undertakings shall obtain an Import and Export License of the People’s Bank of China for Gold and Gold Products in accordance with these Measures.

The provisions on the administration of individuals entering and leaving China with gold and gold products shall be formulated by the People’s Bank of China in conjunction with the General Administration of Customs.

Article 5 The import and export of the state gold reserves shall be handled by the People’s Bank of China.

The import and export of gold coins (including gold precious metal commemorative coins) shall be handled by institutions designated by the People’s Bank of China.

Article 6 The main market players with the qualifications for the import and export of gold shall assume the liability of balancing the supply and demand of material objects on the domestic gold market. Gold to be imported and exported shall be registered at a spot gold exchange approved by the State Council where the first trade shall be completed.

Article 7 Applications for the import and export of gold and the import of gold products donated for public interest undertakings shall be accepted and approved by the People’s Bank of China.

Applications for the import and export of gold products shall be accepted by the branches of the People’s Bank of China at or above the prefecture level and approved by the Shanghai Head Office of the People’s Bank of China, the branches and business management departments of the People’s Bank of China, or the central sub-branches of the People’s Bank of China in the capital cities of the provinces (autonomous regions), and the central sub-branch of the People’s Bank of China in Shenzhen.

Article 8 An applicant for the import and export of gold (except the import of gold for donation to public interest undertakings) shall have corporate status, have no record of violating laws and regulations within the recent two years, and satisfy one of the following conditions:

(I) It is a financial institution member or a market maker on a gold exchange approved by the State Council, with professionals of the gold business, a perfect gold business risk control system, and stable gold import and export channels, whose business carried out on the gold market complies with relevant policies or regulatory provisions, and whose spot trading of gold is active and the volume of transactions for its own account is among the highest in the two years before the application is filed;

(II) It is a comprehensive member of a gold exchange approved by the State Council, and a mining enterprise with annual gold production of 10 tons or more, pollutant emissions during the production process satisfying the environmental protection standards of the state, overseas gold mineral products investment scale exceeding USD 50 million, which has obtained mining rights of overseas gold mines or paragenetic and associated gold mines, which has formed mineral gold production capacity, whose business carried out complies with relevant policies or administration provisions, and whose spot trading of gold is active and volume of transactions for its own account is among the highest in the two years before the application is filed;

(III) It is a mining enterprise, with three consecutive years of domestic taxation records no less than RMB 200 million yuan and investment in overseas nonferrous metals exceeding USD 100 million, which has obtained mining rights of an overseas gold mine or paragenetic and associated gold mine and is ready to produce gold, and whose business carried out complies with the relevant policies or regulatory provisions;

(IV) It is a manufacturing enterprise that assumes the task of producing precious metal commemorative coins for the state;

(V) It is a gold importing and exporting refining enterprise which has become a certified brand on the international gold market.

Article 9 An applicant for the import and export of gold products (except the import of gold products for donation for public interest undertakings) shall have corporate status or the status of other organization, have no violation of laws and regulations within the recent two years, and satisfy one of the following conditions:

(I) For enterprise which produces, processes or uses relevant gold products, it shall possesses necessary production sites, equipment and facilities, discharge pollutant made in the production process based on national environment protection standards and keep a tax payment record that no less than RMB 1 million yuan has been paid each year for a successive 3 years;

(II) For foreign trade operation enterprise which applies to customs certification on enterprise management, it shall keep a tax payment record that no less than RMB 3 million yuan has been paid each year for a successive 3 years;

(III) Educational organizations, science study organizations and so on which need to use gold product for national research project and key subjects.

Article 10 Those which apply for import and export of gold shall submit the following materials to People’s Bank of China:

(I) Descriptions on business conditions including name, address (office place), enterprise profile, using of the imported and exported gold and planned amount etc. shall be noted on the written application;

(II) Application Form for Import and Export of Gold and Gold Product (Annex 2);

(III) Copies of officially sealed business certification of the enterprise legal person;

(IV) Gold import and export contracts and their copies;

(V) Officially sealed copies of Organization Code Certificate of the People’s Republic of China;

(VI) Explanatory materials on whether the applicant has illegal conducts in the past 2 years;

(VII) Financial organization of banking industry shall also offer relevant materials on internal gold business control system; those which apply for gold export shall submit real gold inventory amount certification of gold and commodities exchange approved by State Council;

(VIII) Gold mining enterprises shall also submit pollutant discharge permit certification and copies of annual qualification inspection report issued by provincial environment protection department, copies of relevant foreign investment approval document by the business department, copies of bank out-remittance certification, relevant certifications on exploiting gold in foreign countries or regions and tax payment record of the enterprise in the past 3 years; those which apply for exporting gold shall submit gold production capacity issued by the industry command department or self-discipline organization and registration certification of gold and commodities exchange approved by State Council.

Those which apply for gold import and export again and of which no materials of the aforesaid terms are changed shall only need to submit materials in Item II and Item IV; or shall apply and handle as the first application in case the other materials in the aforesaid terms are changed.

Article 11 Those which apply for import and export of gold product shall submit the following materials to the branch of People’s Bank of China above municipal level where the applicant lives:

(I) Descriptions on business conditions including name, address (office place), enterprise profile, using of the imported and exported gold and planned amount etc. of the applicant shall be noted on the written application;

(II) Application Form for Import and Export of Gold and Gold Product;

(III) Copies of officially sealed legal registration certificate including business certification of the enterprise legal person and legal certificate of public institutions;

(IV) Gold import and export contracts and their copies;

(V) Registration Form for the Archival Filing and Registration of Foreign Trade Operator or Certificate of Approval for Establishment of Enterprises with Foreign Investment in PRC which is sealed with archive filing seal.

(VI) Description materials on whether the applicant has illegal conducts in the past 2 years;

(VII) Enterprises which produce, process or use gold product shall also submit the enterprise tax payment record of the past 3 years, pollutant discharge permit certificate issued by municipal environment protection department and annual qualification inspection report as well as their copies;

(VIII) Enterprise of foreign trade operation shall also submit relevant enterprise management proving materials apply to customs certification and enterprise tax payment record of the past 3 years;

(IX) Education organizations and science research institutes shall also submit proving materials on conducting national research projects or key subjects;

(X) Enterprises which export gold products shall also submit proving materials including added-value tax invoice of gold raw materials obtained within China.

Those which apply for gold import and export again and of which no materials of the aforesaid terms are changed shall only need to submit materials in Item II and Item IV; besides, education organizations and science research institutes shall also submit materials in Item IX and enterprise which export gold products shall also submit relevant materials specified in Item X; or shall apply and handle as the first application in case the other materials in the aforesaid terms are changed.

Article 12 The application conditions specified in Item I, Article 9 of the Measure applies to gold product from processing trade for the domestic market, imported materials of products for domestic market within products listed in Catalogue for the Regulation of the Import and Export of Gold and Gold Products and gold products exported under processing trade with gold raw materials purchased within the territory of China.

For processing trade for the domestic market, the application materials shall be submitted and delivered in accordance with provisions in Article XI of the Measure; besides, materials explaining fair reasons for turning to domestic market, copies of processing trade business approval certificate and processing trade contracts and their copies etc.

For gold products exported under processing trade with gold raw materials purchased within the territory of China, the enterprise shall report the conditions of gold purchase within the territory of China when the processing trade manual is established (changed) and submit Import and Export License of the People’s Bank of China for Gold and Gold Products.

Article 13 As for imported gold and gold product donation made by individual, legal person or other organization for public welfare establishments, the following materials shall be submitted by the Donee to People’s Bank of China:

(I) Donation agreement that conforms to provision of Law of the People’s Republic of China on Donations for Public Welfare;

(II) Legal registration certificate and their copies including public institute legal person certificate or social group legal person registration certificate;

(III) Application Form for Import and Export of Gold and Gold Product

Article 14 People’s Bank of China shall make the administration permit decision within 20 work days since accepting the application for import and export of gold and gold products.

Article 15 Municipal branches of People’s Bank of China shall directly report the primary review opinions and all the application materials to the upper organization within 20 work days since accepting the application for import and export of gold and gold products. And the upper organization shall make the administration permit decision within 20 work days since receiving the primary review opinions and all the application materials.

Shanghai head office, all branches, business management department, central branches of provincial capitals (metropolis) and Shenzhen central branch of People’s Bank of China which directly handle application for import and export of gold products shall make the administration permit decision within 20 work days since acceptance.

Article 16 People’s Bank of China or its branches may review the applicant in case it is necessary to verify the real content of the application materials; the review shall be conducted by more than 2 working staff.

Article 17 The approved applicant shall handle relevant procedures at the customs by Import and Export License of the People’s Bank of China for Gold and Gold Products when handling cargo import and export of gold and gold products.

There shall be one Import and Export License of the People’s Bank of China for Gold and Gold Products for each batch of product and the License shall be used within 40 work days since the issuing date. The licensed party which need a postpone for reasonable reasons may apply for handling a delay procedure to the issuing organization with the original license 5 work days after the expiring of the license.

Article 18 People’s Bank of China and its branches are entitled to supervise and inspect the activities of administration permit items conducted by the Licensee shall be cooperative.

Article 19 The Licensee shall promptly report the implementation conditions of import and export of gold and gold products and provide relevant materials based on the provision of People’s Bank of China and its branches.

Article 20 Despite of the provisions in Article 4 of the Measure, gold and gold products imported and exported by the following means shall exempted from handling Import and Export License of the People’s Bank of China for Gold and Gold Products and shall be supervised by the customs instead:

(I) Imported or exported by processing trade;

(II) Imported or exported between customs special supervision region, tax-free supervision area and foreign territories;

(III) Imported or exported between customs special supervision region and tax-free supervision area;

(IV) Imported or exported by maintenance, shipment return and temporary in-and-out methods.

Article 21 Except for provisions in Article 4, 5 and 20 of the Measure, any individual, legal person or other organization shall not import and export gold and gold products by any other means. Except otherwise specified by the state.

Article 22 Individual, legal person or other organization shall abide by relevant national regulations on anti-money laundering and anti-terrorist financing when importing and exporting gold and gold products.

Article 23 Foreign exchange receipts and payments incurred when importing and exporting gold and gold products shall be handled in accordance to foreign exchange management rules.

Article 24 The Licensee shall not make the following conducts:

(I) Transfer or lend the import and export license for gold and gold products;

(II) Use fake or intentionally made import and export license for gold and gold products;

(III) Acquire the import and export license for gold and gold products by lying or other dishonest conducts;

(IV) Exceed the class, specification and amount scale permitted by the import and export administration;

(V) Make fake donations on imported and exported gold and gold products;

(VI) Fail to register and exchange the imported and exported gold at the gold and commodities exchange based on the provisions;

(VII) Maliciously manipulate gold exchange price by means like hoarding and profiteering, or other conducts which violate the rights and interests of the other investors like cheating;

(VIII) Violate relevant policies or management provision on gold market and gold derivatives exchange;

(IX) Refuse the supervision and inspection by People’s Bank of China and its branches or hide relevant conditions and provide fake materials during the supervision and inspection process.

In case the Licensee makes any of the conducts listed in former terms, People’s Bank of China and its branches is entitled to suspend the handling of its import and export application; those with vital situations shall be punished in accordance to Article 46 of Law of the People’s Republic of China on the People’s Bank of China.

Article 25 People’s Bank of China and its branches is entitled to withdraw the import and export license for gold and gold products of the Licensee by law.

Article 26 Illegal conducts including smuggling or violating customs supervision provisions resulting from importing and exporting gold and gold products by violating the Measure shall be disposed in accordance to laws and regulations including Customs Law of the People’s Republic of China and Regulation of the People’s Republic of China on the Implementation of Customs Administrative Punishment by the customs; or shall be investigated for its criminal liabilities by being transferred by the justice organization in case of crime.

Article 27 People’s Bank of China and General Administration of Customs are responsible for explaining the Measure.

Article 28 The Measure shall be implemented since April 1, 2015.

Annexes:

1. Import and Export License of the People’s Bank of China for Gold and Gold Products

2. Application Form for Import and Export of Gold and Gold Products

Mainstream Media Exaggerated Chinese Commodity Financing Deals

In the beginning of May I wrote an extensive post on why round tripping, also referred to as a Chinese Commodity Financing Deal, does not influence the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange, which equals Chinese wholesale demand. Round tripping merely inflates the import and export of gold between a Customs Specially Supervised Area in the mainland, usually Shenzhen, and foreign countries, usually Hong Kong.

What I didn’t cover in that post was the amount of physical gold tied up in round tripping. Though this does not have anything to do with domestic Chinese gold demand, it can be important because when these financing deals are unwound the gold is released as physical supply. So how much gold is there tied up in round tripping? In the latest report on the Chinese gold market from the World Gold Council, China’s Gold Market: Progress and Prospectswe can read:

Imported commodities are used in China for financing purposes – most notably copper but also, increasingly, gold. Restrictions on finance and lending have boosted this market.

…No statistics are available on the outstanding amount of gold tied up in financial operations linked to shadow banking, but Precious Metals Insights believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000 tonnes, equal to a nominal value of nearly $40 billion.

In this context the WGC used the term financial operations with regard to round tripping and not another type of commodity financing deal. But did they mean 1000 tonnes of physical gold is tied up in round tripping, or a much smaller amount that cumulative inflated trade numbers by 1000 tonnes – over a few years? I’ve sent an email to the World Gold Council (WGC) and got a very clear answer.

In their reply they stated the amount of physical gold tied up in round tripping is far less than 1000 tonnes and that in theory it can’t be more than gross export from China mainland to Hong Kong. This was 337 tonnes in 2013. However, these exports definitely contain jewelry fabricated in Shenzhen to be sold in Hong Kong or other nations; genuine processing trade. Also, the gold tied up in round tripping is likely to make more than one round. If so, every round would make the Hong Kong Census and Statistics Department count the same gold as additional import. For example, if 50 tonnes is round tripped three times, that would show up as 150 tonnes of gross export from the mainland to Hong kong. Though I don’t know either how much gold is tied up in round tripping, I think the amount is far less significant than what mainstream media have presented. Just guessing 20 – 100 tonnes.

To my surprise the WGC added in their email that the amount of gold tied up in round tripping should not be conflated with Chinese demand, as it merely inflates trade statistics. Although I agree, this is contradictory with what they wrote in their report:

…This is the practice commonly referred to as ‘round-tripping’. Moreover, because nearly all gold flowing into China goes through the SGE, round-tripping can inflate the SGE delivery figures. 

As I’ve explained in my prior post, SGE deliveries (or withdrawals they should say) can only be supplied by gold that is imported by one of the twelve commercial banks that have a PBOC import license for general trade. These banks are not engaged in round tripping, which only occurs in processing trade for which no PBOC license is required. SGE withdrawals, that supply the Chinese domestic gold market, are therefor not influenced by round tripping, and neither is Chinese demand.

Chinese gold trade laws

When I was doing research for this post I was quite shocked when I read the articles from Reuters and the Financial Times regarding round tripping again. Reuters stated Chinese firms could have locked up as much as 1,000 tonnes of gold in financing deals“, Izabella Kaminski from the Financial Times seemed happy to go with this number:

China Gold Collateral Financing Shock

This Reuters story about China having up to 1,000 tonnes of gold tied up in financing deals is doing the rounds, courtesy of information out of the WGC.

But it’s hardly a revelation.

We’ve known that China has been using gold (and almost everything else under the sun) for financing purposes for ages.

 Goldman even blessed us with a more recent update about the shenanigans in March…

…A key consequence of such an unwinding could be a commodity shock.

…this is why we’ve always been sceptical of those using rampant Chinese consumption of gold as an indication of an imminent rebound in the gold price.

Many people have been mislead about this subject as the WGC has published incomplete and contradictory information and the major news outlets have misinterpreted the WGC.

The Round Tripping Myth And Why It Doesn’t Hurt Chinese Gold Demand

Much has been written lately about the influence of Chinese commodity financing deals (CCFD) on Chinese gold demand. An often perceived analysis is that CCFD have been inflating Chinese demand/import figures and thus balance the surplus of physical gold supply in China.

In 2013 the mainland net imported 1,158 metric tonnes through Hong Kong – the Chinese do not disclose total net gold import – and domestic mining output was 428 tonnes. Without counting scrap supply and net gold import through other ports than Hong Kong, total supply was 1,581 tonnes (according to me total supply was 2,197 tonnes, as Shanghai Gold Exchange withdrawals equal total supply and demand, more on that later). Most institutions, like the World Gold Council (WGC), the China Gold Association (CGA), and GFMS state Chinese demand was lower than 1,581 tonnes in 2013, forcing themselves to explain where the rest of the supply ended up. I disagree with their explanations that are often based on CCFD. CCFD can be either done through round tripping or gold leasing. This post is solely on round tripping.

Many reports I read on CCFD simply don’t take into account Chinese laws on gold trade and the structure of the Chinese gold market. These are a few of the pieces I stumbled upon regarding this matter, from:

Goldman Sachs
Zero Hedge
Monetary Metals
The World Gold Council
Reuters
FT Alphaville

What are Chinese commodity financing deals?

Simply put Chinese commodity financing deals are trades to acquire low cost capital using a commodity as collateral. There can be many ways to do this, but for now we will focus on round tripping as I would like to demonstrate this does not influence Chinese net gold import or demand. Let’s walk through the reports linked to above and get an understanding of such deals with regard to gold in comparison to other commodities. Goldman Sachs stated a few important facts:

While commodity financing deals are very complicated, the general idea is that arbitrageurs borrow short-term FX loans from onshore banks in the form of LC (letter of credit) to import commodities and then re-export the warrants (a document issued by logistic companies which represent the ownership of the underlying asset) to bring in the low cost foreign capital (hot money) and then circulate the whole process several times per year. As a result, the total outstanding FX loans associated with these commodity financing deals is determined by:

– the volume of physical inventories that is involved

– commodity prices

– the number of circulations

Our understanding is that the commodities that are involved in the financing deals include gold, copper, iron ore, and to a lesser extent, nickel, zinc, aluminum, soybean, palm oil and rubber.

…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. In detail, Chinese gold financing deals includes four steps:

1. Onshore gold manufacturers pay LCs to offshore subsidiaries and import gold from Hong Kong to mainland China – inflating import numbers

2. offshore subsidiaries borrow USD from offshore banks via collaterizing LCs received

3. onshore manufacturers get paid by USD from offshore subsidiaries and export the gold semi-fabricated products – inflating export numbers

4. repeat step 1-3

Making a clear distinction between gold and copper round tripping is very important. Though Goldman Sachs mentions the difference – gold needs to be physically round tripped, copper not – they desist to explain what’s causing this difference. The reason is that the trade laws for gold are different than for every other commodity (because the Chinese government has chosen gold to be a part of China’s economic backbone and likes to have firm grip on this metal). A quote from myself from a post I wrote a few weeks ago:

A very long and complicated story short: In the mainland there are two types of trade; general trade and processing trade. General trade can be considered as normal trade. If gold is imported in general trade this is required to be sold through the Shanghai Gold Exchange. Only 12 banks have general trade licenses for gold from the PBOC (though for every shipment they need anew approval).

1. Industrial and Commercial Bank of China
2. Shenzhen Development Bank / Ping An Bank
3. Agricultural Bank of China
4. China Construction Bank
5. Bank of Communications
6. China Minsheng Bank
7. Bank of Shanghai
8. Industrial Bank
9. Bank of China
10. Everbright
11. HSBC
12. ANZ

It’s not likely the PBOC would approve bullion gold to be exported in general trade.

Additionally there are a few jewelry companies that have PBOC licenses, but these also have to ask for permission for every trade they conduct. The PBOC has a very firm grip on gold trade.

Processing trade is something else. In this trade form raw materials from abroad are imported, processed into products and then these products are required to be exported again. This processing is usually done (there can be exceptions) in Customs Specially Supervised Areas, or CSSA (or Free Trade Zones). Processing trade doesn’t require a permit from the PBOC, as the gold that is imported will be exported after being processed. To export gold from a CSSA to a non-CSSA (that’s the rest of the mainland) a PBOC license is required.

Pocessing trade

An example for a processing trade would be; gold from Hong Kong is exported to Shenzhen (a CSSA just across the border from Hong Kong and well known for its vast jewelry fabrication industry; 4000 manufacturers), then the gold is fabricated into jewelry and imported back into Hong Kong. This trade would show up in Hong Kong’s customs report, but it would not affect Hong Kong net export to the mainland.

Chinese gold trade laws
The rest of the world can trade in the same manner with China mainland as Hong Kong.

Copper trade in China is also done through general or processing trade, the difference being that for copper general trade there is no PBOC license required and imported copper is not required to be sold through the Shanghai Gold Exchange (SGE), or any other exchange. This explains the difference in copper and gold round tripping.

Now let’s jump to what the World Gold Council had to say in it’s latest report China gold market progress and prospects on round tripping. In my opinion they made some conflicting statements, not only regarding CCFD:

Imported gold is being used via gold loans and letters of credit to raise low cost funds for business investment and speculation.

Most of this has been built up since 2011, when gold has been increasingly used as the basis for a variety of financial operations [CCFD] in China that have required the importation of very large quantities of physical bullion. … , there is the use of gold for financial arbitrage operations that will also be based upon gold loans or LCs. In most cases the gold is quickly re-exported to Hong Kong, often as very crude jewellery or ornaments to get round tight controls on bullion exports. (This is the practise commonly referred to as ‘round-tripping’. Moreover, because nearly all gold flowing into China goes through the SGE, round-tripping can inflate the SGE delivery figures.)

In theory only jewellery manufacturers or others active in the gold trade can take out gold loans, although it appears that the rules can be circumvented either by setting up a ‘gold enterprise’ or by using the services of an existing company in the gold trade. …

Gold loans or LCs used to import gold therefore offer wealthy individuals and companies a form of cheap short-term financing either for business or speculation.

The WGC is correct when it states the CCFD are conducted by gold enterprises (and wealthy individuals). These are allowed in processing trade to import gold (in a CSSA), later to be exported. But then they claim this round tripping inflates SGE deliveries, which is false!

First of all the term they should use is SGE withdrawals, that is the amount of gold leaving the SGE vaults entering the Chinese market place, whereas deliveries merely relate to the settlement between longs and shorts after a trading day, that is the amount of physical gold changing ownership in the SGE vaults. Second, although they got the term wrong it’s quite remarkable they don’t spent any more attention to SGE withdrawals; they don’t even disclose withdrawal numbers. How can it be it’s common knowledge in China what the significance is of SGE withdrawals, yet the WGC refrains from discussing this topic? Last but not least, only the 12 banks mentioned above can import gold in general trade, which is required to be sold through the SGE (supply) and subsequently can influence withdrawal numbers (demand). These banks are not involved in round tripping, they don’t need round tripping because they have direct access to the cheapest funding in the world. Gold enterprises are not involved in SGE withdrawals, as gold enterprises can only import gold in processing trade that doesn’t flow through the SGE.

For me there was also some great information in the WGC report, but when it comes to supply and demand I found numerous errors. One other example:

Only banks with PBOC-issued import licenses can import gold. They can only import LBMA good delivery bars and these must be traded through the SGE.

This is true except for the part that they can only import LBMA good delivery bars. The specifications for LBMA good delivery bars is that the weight must be in between 10.9 and 13.4 Kg, while PBOC license holders have imported at least 1,100 metric tonnes in 1 Kg bars in 2013. The correct statement should be: Only banks with PBOC-issued import licenses can import gold. They can import gold bars made by LBMA-approved refiners that meet SGE specifications and these bars must be traded through the SGE”.

Next, GFMS:

Looking at demand by country China tops the list for the first time (based on our data series) as Indian consumption struggled under the government’s import restrictions, higher taxes, a weak rupee and subsequent high domestic premium. Indeed, China consumed 1,283 tonnes of gold in 2013, 28.2% of global physical demand and substantially higher than India at 987 tonnes and 21.7% of global demand. Chinese imports of gold, and deliveries from the Shanghai Gold Exchange (SGE) were also considerably higher than this owing to growth in pipeline stock, increased holdings by commercial banks to back paper products (a legal requirement in China) and some double counting of gold that was involved in round-tripping to Hong Kong ….

Also GFMS briefly mentions SGE deliveries (withdrawals) and acknowledges physical supply transcended demand, which they inter alia explain by “double counting of gold that was involved in round-tripping to Hong Kong”. Though, round tripping has no effect on Chinese net gold import (read the Goldman Sachs quote above) or SGE Withdrawals. Round tripping is only done by Chinese gold enterprises that import gold into a CSSA and soon after export the gold.

The problem these institutions (WGC, GFMS, etc.) have is this:

SGE withdrawals vs WGC Chinese gold demnad

There has been so much gold flowing into the mainland since 2007 of which they don’t know were it ended up (the accumulative difference 2007-2013 was 1,989 metric tonnes in total).

When I called the SGE a few months ago to ask where the difference as shown in the chart above was going, they told me these are withdrawals from individual SGE account holders. If these individuals are secretly jewelers trying to avoid VAT rules or institutional buyers I don’t know. I do know these 1,989 metric tonnes haven’t been used for stock increases at jewelers or banks. In 2012 the accumulative difference accounted for 983 tonnes. With so much gold “in stock” why would they add another 1051 tonnes in 2013?

Another argument by GFMS is that, “holdings increased by commercial banks to back paper products (a legal requirement in China)”. Ok, so that has got nothing to do with demand? That gold is just brought into a vault, laying there soon to be obsolete? No, they’re referring to Chinese buying gold on paper that oddly enough has to backed by physical gold in China – I know, it’s unbelievable. According to me all arguments GFMS presents to explain the large amount of SGE withdrawals, of which they refuse to disclose the numbers, are untenable.    

Reuters disclosed a very important quote in their article:

“I do not think there is large scale gold trade-financing deals like in copper,” said Jiang Shu, an analyst with Industrial Bank, one of the few gold-importing banks in China. Import quotas and a limited number of banks allowed to import meant gold would not be a popular choice for commodity financing deals, he added.

This gentleman can know because he works at one of the banks that is allowed to import gold in general trade and it’s very likely he knows a thing or two about the Chinese gold market.

From Goldman Sachs:

…However, we don’t know how many tons of physical gold are used in the deals since we don’t know the number of circulations, though we believe it is much higher than that for copper financing deals.

Yes, the number of circulations can be in between 1 and X. But, for sure these circulations do not influence Chinese net gold import or SGE withdrawals.