Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Chinese Shadow Banking and Commodities

Commodities / China Credit Crisis Mar 31, 2014 - 02:09 PM GMT

By: Alasdair_Macleod

Commodities

The story that commodities are at the centre of China's shadow banking system has gained prominence in recent weeks. No firm evidence has been presented to confirm the scale of these activities, bearing in mind China's State Administration of Foreign Exchange (SAFE) clamped down on these activities last May (http://www.bloomberg.com/news/2013-05-23/china-rule-changes-may-halt-copper-financing-deals-goldman-says.html).


Various commodities, particularly copper but also gold, are allegedly being used as collateral for raising large amounts of cash. The original story concerned onshore leveraged borrowers (http://www.ibtimes.com/copper-china-financing-business-may-cause-further-price-falls-1560678), which was followed more recently by others implicating offshore investors. Put very simply, a commodity-financed deal requires an offshore bank to issue a letter of credit against physical commodity stocks either in transit or held in bonded warehouses, which can be cashed onshore into local currency. This currency is then invested for a significant yield pick-up over the cost of owning the commodity, and is cheaper than funding this carry trade with US dollars.

It cannot be denied that inventive minds will always find a way round government regulations, but it is unclear how we differentiate these trades from normal trade finance, which also requires letters of credit and similar banking arrangements. The thought that SAFE is not competent to regulate commodity-backed lending and is unaware of its scale is difficult to unquestioningly accept. The foreigners prepared to rashly risk their money in a commodity-financed carry trade are a mystery to rational thought.

Instead, we run into a forest of assumptions. The believers in this story cannot identify the changes in bonded stock levels to support their argument. However, the dubious quality of analysis is even more obvious when it comes to gold.

Use of gold for commodity-based financing has to overcome the Chinese authorities' strict controls over the gold market. This is not to be confused with normal on-balance sheet facilities offered by the Shanghai Gold Exchange's member banks. Western analysts often make the mistake of regarding gold simply as another commodity, but signalled by their actions the Chinese government obviously takes a different view. It has effectively cornered the global physical market and simply refuses to let gold leave the mainland, except for licenced jewellery manufacture in Hong Kong and very small amounts in personal possession. The market is tightly controlled through the People's Bank of China, which in turn controls the SGE. The PBOC is extremely unlikely to tolerate the sort of activity claimed, and the licensees know it.

Exaggerating the scale of commodity-financed shadow banking in China supports a bearish stance, because unwinding these deals is expected by the authors of this story to release a flood of physical metal. Coinciding with China's economic slowdown, it has already helped drive copper to four-year lows. For gold it has doubtless contributed to the recent fall in the price, favouring bullion banks unable to cover their physical commitments.

It may be too cynical to suggest that vested interests are behind the promotion of this commodity financing story, but the authors do seem to be ignoring the blindingly obvious. China's copper stocks are backed by real demand and gold is firmly in the grip of the PBOC. China's government and people value physical gold over superabundant fiat currencies and regard it as a hedge against economic uncertainty, not a victim of it.

Alasdair Macleod

Head of research, GoldMoney

Alasdair.Macleod@GoldMoney.com

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2014 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Alasdair Macleod Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in