(Kitco News) – A number of Chinese commercial banks have raised the risk classifications on their precious metal products – and for physical gold in particular – following the elevated volatility seen in the market
According to a report from Chinese media outlet Yicai Global, the precious metals investments now classified as ‘higher risk’ are mainly physical gold products. A banking sector insider told Yicai that banks are actively discouraging clients from gold investment: They have stopped opening new accounts for these products, and existing clients can only close their positions, and cannot add to them.
The report noted that Comex gold futures shot up by more than 28 percent early in November, then pulled back 6.5 percent, only to rebound soon afterward. By raising risk classifications, banks aim to protect less experienced or risk-averse retail investors from potential losses.
“Chinese lenders are also phasing out investment products that track commodity futures markets, while enhancing risk control measures, and tightening investor access,” the insider said. “These measures include prohibiting new account openings, limiting trading to existing customers, raising risk classifications, and setting higher minimum investment amounts.”
They added that some banks are also having investors redo personal risk tolerance assessments.
“China Construction Bank, for example, no longer allows customers whose personal risk tolerance rating is conservative and cautious to invest in certain physical gold products after it raised the risk classification,” the report noted. “Moreover, banks may wind down trading-type investment products for precious metals, keeping only those with relatively low-risk classifications, such as physical investments, the insider added.”
China’s gold market in flux
The banking policy change comes after months of wild swings in price and demand in the world’s largest gold market, which have seen China’s population and central bank switch from the driving force behind the gold rally to a place on the sidelines as prices set record highs.
China's net gold imports through Hong Kong fell 4.6% in October from the prior month and were down 43% from the previous year, the Hong Kong Census and Data Department announced on Tuesday.
“The latest figures from Hong Kong Customs and Excise make interesting reading,” wrote StoneX Bullion analyst Rhona O’Connell. “The big outlier this month is China (which is always the country worth monitoring, for obvious reasons).”
“The China numbers show us that Hong Kong's net exports into China last month were down by 51% against the January-September average, although the absolute Export+Re-Export numbers, at 28t, were only down by 30%,” she said. “The reason for this is that there were 13t of imports into Hong Kong from China in October. It is well-known that domestic demand at the retail level has been sluggish due to the anaemic domestic economic recovery and thus an associated reluctance to spend on adornment jewelry,” although demand for investment grade jewelry, bars and coins remains stronger.
O’Connell said that weak jewelry demand has been a key driver of the disconnect between Shanghai gold prices and those on the international market.
“For 15 of the 18 weekdays (I don’t have numbers for Saturdays and Sundays), Shanghai was at a discount to the international price and for more than half of these days that discount was wider than $20, thus providing an incentive for market traders to move gold offshore and pocket the difference,” she said. “There is also the possibility, of course, of round-tripping.”
Cooling mainland demand impacts gold retailers
The dwindling demand for gold jewelry on the mainland is also having a major impact on retailers. Chow Tai Fook Jewellery Group Ltd., China’s largest jewelry retailer, saw revenue plunge 20.4% in the half-year ending in September, the biggest drop for that period since 2016.
China accounts for more than 80% of the company’s revenue, but weak consumer confidence amid plunging property prices and high unemployment have discouraged customers from purchases. Surging gold prices have further dampened demand. The slow recovery of the tourism sector in Hong Kong, the group’s second-largest market, also contributed to the decline.
Same-store sales fell 25.4% in self-operated shops in mainland China and 30.8% in Hong Kong and Macau in the six months ended September. The company also reduced its sales network by 239 stores — mainly franchised ones — to cut costs and improve profitability.
And the story was very similar at fellow Hong Kong-based jeweler Luk Fook, which closed 175 stores in China and Hong Kong in the six months to September as record-high gold prices impacted revenue and earnings.
The company’s revenue was down 27% year over year to HK$5.45 billion ($700.2 million), the company announced on Tuesday. Net profit slid 56% to HK$417.2 million ($53.6 million) as a result of gold hedging during the period.
