China Backing Loans with Gold Bullion that Didn’t Exist?

China Backing Loans with Gold Bullion that Didn’t Exist?

The ongoing investigation into missing aluminum and copper stocks in the Chinese port city of Qingdao has already involved over twelve Chinese Banks, as well as such banks as HSBC, Citigroup, and Standard Bank. Recent estimations of the loans that now may be at risk exceed $2 billion, but the latest report on the missing metals has turned up something even more problematic — missing gold.

The National Audit Office in China recently found over $15 billion in fraudulent loans that were backed by physical gold stocks that simply did not exist. Banks were using fake cross-border currency swap loans that were backed by gold bullion, in order to take advantage of the spread in interest-rates outside and inside China. Liu Xu, a Beijing-based analyst for Capital Futures commented that this report is the “first official confirmation of what many people have suspected for a long time — that gold is widely used in Chinese commodity financing deals.”

The gold trade is more regulated than the trade of many other commodities, such as copper and aluminum, so the banks involved are most likely Chinese banks. The copper market already reeled with the news of the missing copper in Qingdao, so this latest news involving missing gold stocks could encourage a short-term sell-off by investors with gold assets. Additionally, this new report is likely to discourage western banks from lending against commodities in China. Due to the lack of transparency in the commodity markets in China, the effects could be large.

Chinese companies alone are estimated to have taken out over $150 billion in commodity-backed loans in the last few years. Should the available credit start to diminish, the effects on China’s economy, and on the value of the yuan could be severe. Unfortunately, we are still missing answers to many of the most important questions, including the total amount of money that was lent against Chinese commodity stocks, or how deep the investigation shall go. Due to the nature of global finance, however, the problem of China’s missing metals simply won’t go away.

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