Tag Archives: Chinese gold lease

Zooming In On The Chinese Gold Lease Market

The primary reasons mainstream gold analysts (and the media) don’t use Shanghai Gold Exchange (SGE) withdrawals as an indicator for Chinese wholesale gold demand, are – after a few others have been tested – Chinese Commodity Financing Deals (CCFD). Regarding gold these financing operations can be be conducted through round-tripping or gold leasing. Because of the structure of the Chinese gold market round-tripping gold flows are completely separated from the Chinese domestics gold market – the SGE system, and thus SGE withdrawals. There is no need to further investigate round tripping for our understanding of the Chinese domestic gold market.

Turning to gold leasing. The Chinese gold market is structured as such that gold leases are settled on the SGE; lessor and lessee come to an agreement after which gold is transferred from the lessor’s SGE Bullion Account to the lessee’s SGE Bullion Account. As I’ve stated previously lessees will only withdraw gold from the vaults of the SGE when the leased gold will be used in genuine gold business (The World Gold Council agreed with me in email correspondence), as a lessee that is merely seeking cheap funds has no interest in obtaining physical gold, he prefers to sell the leased gold spot at the SGE for its proceeds. Therefor, leasing gold for acquiring cheap funds adds little distortion to total SGE withdrawals when used as wholesale gold demand indicator.

However, to get to the bottom of this, which seems to be my mission in life, we must zoom in on the Chinese gold lease market. Below I present an article written by Minsheng Banking Corp in 2014, translated by Soh Tiong Hum and BullionStar’s Sales Executive See Hong Kang. The article provides essential data on the Chinese gold lease market, for the first time we can read how total lease volume is compounded, what industry segments are leasing how much gold and in what tenors total volume is divided. In a separated post we will analyze these numbers, as I’m still talking to SGE staff and Chinese banks to be positive on the meaning of all numbers. 

If you are confused about what the article states as being Chinese consumer gold demand (1,170 tonnes in 2013), consider this China Gold Association (CGA) estimate is measured at retail level and likely only from sales by CGA members. To familiarize with all demand metrics used in the Chinese gold market read this post.    

Some data handles:

2013 CGA vs WGC

Translation of the Minsheng Banking Corp article, written by Tang Xiang Bin, 2014:

Gold Supply & Demand, Gold Leasing And Shenzhen Market Research Report

Abstract: In 2013, domestic consumer demand for gold reached a record high of 1,170 tonnes for the first time, more than 35 % over 2012. As rationality returns to consumers, 2014 domestic gold demand may retrace back to normal levels after being depleted by last year’s explosive growth. As imports are able to meet gold demand, China’s gold market shall move from shortage to balance. We expect this year’s first quarter gold and jewelry spending year on year growth will drop to 10 – 20 % of the normal level, while second quarter gold consumption demand will slow further. Expected 2014 domestic gold demand should stay between 900 – 1200 tonnes.

2013 ushered in explosive growth in the gold lease market. The domestic gold lease volume grew substantially to 1,070 tonnes, an increase of 268 % y/y. Based on demand, 2013 gold leasing by enterprises and brand makers reached 781.1 tonnes, 73 % of the year’s total volume, which shows that China’s jewelry market is the most important customer segment. From the rate of growth, interbank gold loans grew rapidly. 2013 interbank leasing increased 439 % y/y which indicates that financialization of gold between China’s banks have strengthened.

Because China’s economy and credit market both face risk of deleveraging this year, gold leasing can satisfy banks’ need to expand their business as well as meet financing needs of gold enterprises when there is a credit crunch in the background. Therefore deleveraging is conducive to the growth of the gold lease market.

At the moment, Shenzhen already has the largest domestic gold and jewelry processing base, the largest center of demand for spot gold, the largest gold wholesale center, the largest physical gold settlement and the largest OTC market. In other words, Shenzhen has a competitive advantage for developing gold market activities. Backed by strong demand and an industrial chain, gold leasing in Shenzhen has great potential and space for development.

End of abstract

minsheng gold lease market report 2014

Domestic gold demand in 2013 grew enormously due to substantial fall in the gold price. National gold consumption grew to all-time high of 1,170 tonnes, a 35 % increase y/y. Although last year’s gold demand was not evenly distributed, volatile fluctuation between domestic and foreign gold prices reflected the fluctuation in demand. Large increases in gold imports were able to satisfy this sudden increase in demand. We expect this year’s jewelry consumption growth to retrace to normal levels. Gold consumption in 2014 shall maintain between 900 – 1200 tonnes. Following a rise of gold inventory in recent years, gold leasing enters a phase of explosive growth. 2013 gold leasing reached 1,070 tonnes worth RMB 300.6 billion, 268 % higher y/y. With deleveraging going on in 2014, both banks and clients have stronger interest to push gold leasing. Therefore gold leasing should maintain the trend of high-speed growth, hopefully becoming a bright spot when banks are going through downturn.

After explosive growth in 2013, domestic gold demand should retrace to normal this year

Gold demand in 2013 goes through huge growth

China’s domestic gold demand experienced explosive growth last year, overtaking India as the world’s number one gold consumer. For the whole of 2013, transacted spot gold (AU99.99) at Shanghai Gold Exchange hit 3,188 tonnes, 280 % growth y/y. Explosive growth shows demand for spot gold at the exchange exceeded the 2012 level. Besides the exchange, domestic consumer demand (especially in the first half of the year) also experienced explosive growth. For the whole of last year, Gold jewelry consumption broke a record with RMB 296 billion, 34 % increase y/y. In the second quarter, gold jewelry consumption broke quarterly record with RMB 82 billion, 28 % of the whole year.

Gold imports can satisfy domestic gold demand

Increase in gold imports satisfied explosive growth in gold demand. In 2013, gold demand grew explosively. 2,197 tonnes of physical gold left the SGE that year, a 193 % increase y/y. Because domestic production of gold is unable to meet demand, imports became an effective means. Import from Hong Kong increased significantly. In 2013, gold import from Hong Kong reached 1,498 tonnes, 179% increase y/y. Importing gold can satisfy domestic demand effectively.

As gold imports increased, the ability of commercial banks to supply the gold market increased visibly. Since 2012, China’s import from Hong Kong and SGE’s settlement volume on a monthly basis appeared to be consistent. The logic is really simple: The more gold the commercial banks are able to import, the stronger the ability of other participants in the gold market to provide gold liquidity. Conversely, if the banks lower the volume of gold imports, the ability of participants in the market to provide liquidity for gold would weaken. This year, the banks operating in the gold market have seen a test of their ability to react to a demand growth explosion.

Last April’s drop in the international gold price stimulated an explosive increase in demand for spot gold. Vibrant domestic demand quickly depleted inventory so that SGE’s Au(T+D) settlement dropped rapidly. Inventory dropped to 24.85 tonnes, the lowest level in May that implies power by banks and enterprises to deploy gold nearly withered. Gold imports stabilized domestic supply. Deployment by banks and enterprises recovered shortly, SGE’s Au(T+D) settlement also returned to normal.

After rise in demand, domestic gold demand will retrace to normal

It’s noteworthy that 2013’s explosive demand may be ‘abnormal’ consumption because it was triggered by the major correction in the international gold price since many years. As rationality returns, it is difficult to sustain this demand this year. Fact is consumption demand in the second half of 2013 already began weakening. China’s gold jewelry consumption growth y/y already weakened from July’s 44.7 % to 33.9 % at year-end. Demand at the SGE also weakened visibly. SGE’s monthly spot gold transactions fell from a year-high of 358 tonnes in July to 210 tonnes by October. In addition, SGE’s monthly withdrawals fell from 235 tonnes in July to 139 tonnes in October. We estimate that both figures will continue to slowdown and we should see the growth rate return to its’ normal 10 – 20% and gold demand at between 900 – 1200 tonnes.

The scale of gold lease market will continue to grow quickly

Over the past few years, the gold lease market has developed from nothing till the scale it is today. At last count in 2013, 23 commercial banks have gold leasing operations and the businesses participating in leasing have mushroomed to close to a thousand. In terms of scale, last years leasing market grew explosively with leased volume reaching 1,070 tonnes, a 268% increase y/y. Based on demand, 2013 gold leasing by enterprises and brand makers reached 781.1 tonnes, 73% of that year’s total volume, which shows that China’s jewelry market is the most important customer group. From the rate of growth, interbank gold loans grew rapidly. 2013 interbank leasing increased 439% y/y, which indicates that financialization of gold between China’s banks has strengthened. Because China’s economy and credit market both face risk of deleveraging this year, gold leasing can satisfy banks’ need to expand their business as well as meet financing needs from gold enterprises when there is a credit crunch in the background. Therefore deleveraging is conducive to the growth of gold leasing.

Gold lease market grew explosively in recent years

The gold leasing volume reached 398.06 tonnes in 2012. The breakdown of the lease volume:

  • Interbank leasing was 21.82 tonnes, 5.48% of total.
  • Refining companies leased 72.9 tonnes, 18.31% of total.
  • 110 tonnes was used to produce brand name gold products, ie, gold products with brand names, 27.78 % of total.
  • Leasing for jewelry and industrial use accounted for 192.76 tonnes, 48.42% of total.

In 2013, the gold leasing volume grew substantially to 1,070 tonnes, a 268 % increase. The breakdown of the lease volume: 

  • Interbank leasing was 117.7 tonnes, 11% of total.
  • Refining companies leased 171.2 tonnes, 16% of total.
  • 363.8 tonnes was used to produce brand name gold products, ie, gold products with brand names, 34% of total.
  • Leasing for jewelry and industrial use accounted for 417.3 tonnes, 39% of total.

Based on growth, gold lease demand in 2013 increased by more than 100%. Interbank lending grew by 439 %, refining companies leasing grew 135 % and brand name companies leasing increased 116 %. Increase in loans between commercial banks indicate that rise in demand pushed the growth in activity between commercial peers as well as increasing financialization of gold in China’s banks. Based on demand, 2013 gold leasing by enterprises and brand makers reached 781.1 tonnes, 73% of that year’s total volume, which shows that China’s jewelry market is the most important customer group.

The Chinese gold lease rate reached its top in the second half of 2013 at 10.2 %, the lowest rate was 2.1 %, the average was 4.19 %. Among various tenors of lease contracts, 1 year leasing accounted for 44.26 % of total contracts, 6 to 12 months was 35.24 %, 3 to 6 months was 10.38 % and less than 3 months 10.12 %.

Gold lease market has prospects to be a bright spot in banking that is deleveraging

China’s economy and credit market are facing risk of deleveraging this year. In the deleveraging process, ‘big’ business drivers that banks enjoyed in the past few years are consolidating whereas ‘small’ drivers that have unique proposition have the prospects to become a bright spot.

Firstly, first quarter economic statistics came in below market expectations. Important economic numbers like manufacturing value added, retail sales and investments look weak which leaves hints that first quarter economic growth is likely to come in below government target. Secondly, this year’s M2, new loans, financing numbers are evidently slowing down which indicate that China is undergoing deleveraging. In this macro environment, banks are trapped in a dilemma. On one hand, deleveraging forces banks to be wary of risks associated with ‘big’ businesses that have been expanding tremendously. On the other, banks are pressured to deliver profits. Under pressure from such concerns, banks are more willing to develop businesses that are not constrained, not high-risk and have unique propositions. Gold leasing can satisfy banks’ need to expand their business as well as meet financing needs of gold enterprises when there is a credit crunch in the background. Therefore deleveraging is conducive to the growth of gold leasing.

Along with the flow, Shenzhen has best competitive advantage to develop gold market

Map Shenzhen China

After nearly 2 decades, a multi-layered gold market was shaped in Shenzhen. It’s supported by manufacturing, driven by physical trade and supplemented by leasing. In the 1980s, Shenzhen took over Hong Kong’s jewelry manufacturing by offering lower costs. After 20 years of development, Shenzhen became an integrated production, value-added processing and wholesale chain. According to data from the People’s Bank of China, the value of gold and gem-set jewelry production and processing is 70% of the total (Chinese jewelry production and processing) and the export value for gold jewelry is 30% of the total (Chinese jewelry production and processing). Shenzhen, therefore, qualifies to be the largest processing base, the largest wholesale center and most competitive city. Based on such an achievement, Shenzhen conceived the earliest domestic jewelry retail market, which transformed a very visible gold market.

At the moment the Shenzhen gold market has SGE membership system, commercial banks and OTC gold trading. Products include jewelry, physical gold, paper gold as well as gold leasing. SGE’s historical data shows that Shenzhen physical gold delivery is 45% of national total that makes it the largest delivery location. Data from the Shenzhen Gold and Jewelry Association states that gold usage in Shenzhen city is 90% of national total. Shenzhen is therefore China’s largest spot gold market driven by trading in physical gold. Based on incomplete data, there were 921 finished gold lease deals in Shenzhen in 2013, with an accumulated gold lease volume of nearly 110 tonnes. This number was 26.36% of the total gold lease volume of gold-using enterprises in ChinaAdditionally, Shenzhen has a massive OTC market but lacks sufficient data for evaluation. Based on estimates, OTC market volume in Shenzhen is comparable to spot trading on the SGE. The OTC market comes in 2 parts:

  1. Non-standard physical gold including gold ore, recycled gold etc. This gold comes from domestic gold sources, passes through Shenzhen and Hong Kong and forms a production-supply-retail chain.
  2. Black market speculation including locking in gold prices, downside hedging and simple profiteering from gold spot and futures.

Shenzhen is already China’s most important gold market. It is the largest jewelry-processing base, the largest demand for spot gold, the largest wholesale center, the largest physical gold delivery location and the largest OTC market. Shenzhen has the most competitive advantage to develop gold business. Backed by strong gold demand and manufacturing, gold leasing in Shenzhen also has tremendous potential and room for development.

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.