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on why round tripping, also referred to as a Chinese Commodity Financing Deal, does not influence the amount of gold withdrawn from the vaults of the Shanghai Gold Exchange, which equals Chinese wholesale demand.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 Prospects, we 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.
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.