Gold accumulation plans used as trading vehicles
Products such as Gold Accumulation Plans (GAP) have also witnessed robust activity, providing an efficient and flexible channel for investors to get exposure to gold.
The first GAP in China was launched by the World Gold Council and ICBC in 2010. Since then a range of similar products have been created, including automatic monthly gold investment plans. These products provide investors with direct exposure to the gold price backed by physical gold. Although many other banks have launched similar products, ICBC remains the market leader.
Annual GAP trading volume12 exceeded 500t in both 2014 and 2015, as investors used the product to gain short- and medium-term, speculative exposure to gold. This trading mentality contrasts with retail bar and coin investors who typically invest for a longer period.
While GAPs have high trading volume, their impact on Chinese gold demand is modest. Net inflows into GAPs, including automatic monthly gold investment plans, was around 25t to 30t in 2014 and 2015. 2013 was an exception, with investments in GAPs nearing 100t according to data from the PBoC.
Gold leasing: a new market
Over recent years we have observed a rising number of commercial banks participating in the gold leasing market. Gold leasing has allowed companies, such as jewellery manufacturers, to reduce production costs, hedge against price fluctuations, and raise finance.
There are two gold leasing data sources available: i) the Shanghai Gold Exchange (SGE), and ii) the PBoC, which helpfully provides additional granularity by distinguishing between leasing between banks (interbank leasing) and leasing to corporate clients.
In 2015, SGE reported a 62% increase in gold leasing to 3,136t,13 while the PBoC reported that leasing by commercial banks stood at 2,432t, up 32% from 2014. The PBoC further said leasing to corporate clients stood at 1,583t (+16%) and interbank leasing rose by 79% to 849t.
SGE’s leasing estimate is usually larger than the PBoC’s as it has a larger sample size. The PBoC’s data just captures leasing by commercial banks’ headquarters, while the SGE’s also includes leasing by bank branches.
It’s estimated that around 10% of the leased gold leaves the SGE’s vaults. The majority is for financing purposes and is sold at the SGE for cash settlement.
Ambitious overseas activity
As well as developing their domestic market, China’s banks have been active on the international stage.
After topping the notional 10,000t mark in 2014, overseas gold derivatives’ trading volume by China’s commercial banks continued to increase. According to PBoC data, China’s commercial banks traded 13,930t (+34% YoY) of gold on overseas exchanges and OTC markets in 2015.
Some of the large banks’ direct participation as LBMA market-makers has further enhanced China’s role in the global gold market.14 And ICBC Standard Bank’s recent purchase of a precious metals vault in London is illustrative of China’s banks’ growing presence in the world’s largest over-the-counter gold market.
Commercial banks’ gold holdings have increased
To support these gold related businesses, commercial banks have increased their gold holdings.
Hard data on banks’ tonnage holdings are hard to come by. But we have looked at a large sample of banks’ annual reports which include the RMB value of their precious metals holdings. This sheds light on the growth of their gold businesses.
Assuming 100% of the precious metals assets held by commercial banks were gold, total holdings by the 15 commercial banks we track increased by 38% in 2015 to approximately 2,700t.15 Holdings by the “Big Four” banks16 (ICBC, ABC, BOC and CCB) were close to 1,900t (+27%).
A large portion of this growth is a result of the growth in the gold leasing market. And in recent years, smaller banks have been most active in this market. Holdings by the smaller 11 banks increased by 74% to around 800t in 2015.17 Shanghai Pudong Development Bank, for example, attributed its 145% increase in its annual precious metal assets to the increase in leasing physical gold. In addition, a couple of banks were granted gold import licenses in 2015 and have pledged to further promote gold leasing and precious metals proprietary trading.
It is that clear commercial banks play a key role in China’s gold market, and have developed exciting gold business both within China and, more recently, overseas. Given the radical pace of change within the industry, any observer of China’s gold market should also follow developments in China’s commercial banks’ businesses.