China banks curb loans to commodities firms in hot-money battle

SHANGHAI/HONG KONG - Chinese commodities firms importing everything from gold and rubber to base metals are struggling to get trade loans as banks scrutinize their activities and hold back credit following Beijing's orders to rein in currency speculation.

China is the world's top consumer of base metals and rubber, and the second-largest gold buyer after India. A crimp in imports as financing becomes harder will be bearish for the international benchmark prices of these commodities, but could mean their domestic prices will be supported.

The latest crackdown mainly targets companies that are heavily involved in buying and selling imported goods stored in bonded warehouses within China's tariff-free areas. Those that import raw material into the country for their own consumption are less affected.

Banks in Guangdong province such as Industrial and Commercial Bank of China, the country's No1 bank, and China Minsheng Bank have stopped issuing letters-of-credit (LCs) with long maturity dates to some jewellers, which import gold into the mainland for export processing.

"All (companies) cannot get LCs for transit trade in Guangdong at the moment," said a source whose firm trades base metals and manufactures aluminium products in the southern province. He was referring to the trading of bonded stocks.

ICBC and Minsheng could not be reached immediately for comment.

China's gold market is tightly controlled, with import licenses granted to a handful of banks and export permission given only to authorized jewellery makers. The latter are mostly in manufacturing centers, such as within the bonded customs area in Shenzhen and gold processing centers in Guangdong.

In the Panyu and Huadu districts in Guangzhou city in Guangdong, there are over 900 jewellery makers. Their close proximity to Hong Kong has allowed the two areas to become an important jewellery processing base for exports.

Profitable trades

Some jewellery makers, trade sources said, have used LCs with maturities of up to a year to import gold as raw material. They would then export gold products, in many cases to their Hong Kong subsidiaries, at higher-than-market values and bring back the yuan into China.

Hong Kong holds the biggest pool of yuan outside of China and is one of the few centers from where the yuan can be repatriated to the mainland.

The yuan would be invested in sectors such as property or the higher-interest bearing accounts of Chinese banks or in financial products that offer returns of at least 4-6 percent per annum. That compares with borrowing costs of around 2 percent a year for the dollar in Hong Kong.

Such trades are also profitable because with the currency rising - the yuan has hit record highs against the US dollar since April - fewer yuan are required to repay the dollar loans.

In some cases, the gold importers would tie up with overseas investors who were looking to circumvent China's strict capital controls and profit from currency movements, trade sources said.

But these deals have contributed to a ballooning trade surplus, the sources said. China ran a capital and financial account surplus of $102 billion in the first quarter, up from $20 billion in the fourth quarter of last year, reflecting the heavy capital inflows.

The distortions led Beijing to set new rules earlier this month to stop fake trades. The rules, to take effect from June 1, require banks to tighten the management of their foreign exchange lending and types of clients that are able to access those loans.

The country's currency regulator has said it will issue warnings or even blacklist firms that are unable to provide satisfactory explanations for the gaps in their trade activities.

Rubber, copper

Banks in the coastal city of Qingdao in Shandong province, a key tire production hub, have also begun investigating some 100 rubber trading firms to crack down on fake trades, industry participants said, although most rubber traders are still able to secure loans.

"But as far as we know, there is no problem regarding banks opening LCs for rubber traders ... Given China is the largest consumer and buyer, they need loans to do the trading and there is not a lot of false trading in rubber," said Bao Ying, an analyst with Dadi Futures.

The tougher lending regulations is also set to affect copper trade.

The clampdown would have some impact on gold imports in the near term, analysts said, but volume is unlikely to drop significantly as banks remain the largest importers.

"Unlike copper, gold isn't a popular financing tool because it is less liquid," said Sun Yonggang, a gold analyst with Everbright Futures.

"Physical demand is also very strong in China so banks are unlikely to shut off credit to the large jewellers for long."

The steep fall in international gold prices in April unleashed years of pent up demand in China for coins, bars and jewellery. Gold is down nearly 18 percent this year.

Even before the recent price plunge, imports were climbing. Net gold flows from Hong Kong to China jumped to 223.519 tonnes in March from 97.106 tonnes in February, smashing a previous record of 114.372 tonnes in December, data from the Hong Kong Census and Statistics Department showed.