China's commodities trading sector has been dealt a fresh hammer blow after its National Audit Office's (NAO) uncovered tens of billions of renminbi (RMB) in loans were obtained on the back of false gold transactions.
The NAO said that RMB94.4bn ($15.2bn, €11.2bn, £8.9bn) worth of loans had been backed by falsified gold transactions.
The report suggested that bullion producers had been borrowing on the back of commodities stocks, subsequently holding the borrowed amount in high-yield securities. This practice became more common after the Chinese government tightened lending restrictions in an effort to limit the amount of cheap liquidity in the market.
However, it has emerged that the producers (of which there were 25) have been borrowing on the back of non-existent transactions.
The news comes as the probe into the Qingdao Port copper and aluminium fraud continues, with authorities investigating commodity traders who are alleged to have obtained multiple loans on the back of single instances of metals stock.
Helen Lau, senior analyst for metals and mining at UOB Kay Hian in Hong Kong tells IBTimes UK that the news will further spook banks, which have limited or in some cases stopped lending to Chinese commodity traders.
"Already the banks are very cautious. They already cancelled or reduced their loans to any commodity houses. They've suspended new accounts. I think there'll be a supply squeeze – especially on metals like copper. There's not much supply from the warehouses, inventories have been reduced," Lau said.
However, some western banks have moved to assuage fears that they will withdraw from China completely.
Today, Standard Chartered CEO Peter Sands said that the bank's total exposure to Qingdao Port is about $250mn but that the bank did not see material first-half impact from this exposure.
A spokesperson said that the bank will not be pulling back from providing metals financing or from China.
Standard Chartered had been one of the first banks to voice concerns over the metal financing scandal at Qingdao and was swiftly followed by HSBC, which told IBTimes UK that while it was continuing to provide commodity financing in China, "it was assessing each transaction on its own merits, taking into account the interests of our customers, the bank and its shareholders".
Last week, Chinese state-owned commodities house Citic Resources announced that more than half of its alumina stock held at Qingdao Port in the north-east of China was missing.
Citic said it "has been unable to sequester about 123,446 megatons of alumina which the group has stored at Qingdao Port". In total, the group had held 223,270 megatons in Qingdao".
The Qingdao investigation has sent a ripple of anxiety through markets. This will only be compounded by the gold bullion scandal, which appears to be on a much larger scale.
China is the world's largest consumer of gold and it's estimated that up to 1,000 tonnes of the commodity is tied up in Chinese transactions.
Just yesterday (25 June), it rivalled Singapore in the race to provide viable gold pricing benchmarks in Asia, amid accusations of a lack of transparency in the World Gold Council's benchmark, the industry standard. The latest revelations will surely leave these hopes in tatters.
The NAO also found that in a random check of 12 emergency coal mines, monthly stocks were 30% and 18% below the stipulated levels in 2011 and 2012, respectively, whereas the condition in which auditors founds some commodities stock has also been reported.
Almost 2.5 million tonnes of cotton were kept in open storage by Sinograin, the state-owned grain company. Grain in China is permitted 3% impurities, but 70% of Sinograin's stock contained more than this level.