Commercial banks in China have altered the risk classifications on certain previous metal products, including physical gold, as a response to increasing market volatility.
The Chinese media outlet Yicai Global reported on Thursday that the previous metals investments now classified as ‘higher risk’ and are mainly physical gold products.
According to a banking sector insider speaking to Yicai, banks are actively discouraging gold investment by refusing to open new accounts for these products. They limit existing clients to closing their positions, prohibiting them from adding to their investments.
The report highlighted that commodity exchange gold futures surged over 28 per cent early in November before retreating 6.5 per cent and quickly rebounding. By raising risk classifications, banks aim to shield less experienced or risk-averse retail investors from potential losses.
Several major banks in China, including some of the largest like Industrial and Commercial Bank of China (ICBC), have raised the risk classification of their precious metals products, particularly those linked to physical gold.
This adjustment means that new investments in these products are either restricted or entirely halted. Instead of outright bans, some banks are focusing on increasing the risk assessment for these products, thereby making them less accessible to the average investor.
This is seen by some observers as a method to cool the gold market and prevent speculative bubbles similar to those seen in other investment areas in the past.
“Chinese lenders are also phasing out investment products that track commodity futures markets, while enhancing risk control measures, and tightening investor access,” according to an insider.
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Banks cite market volatility as reasons for protecting consumers
The move comes at a time when gold prices have been experiencing considerable fluctuations, driven in part by global economic uncertainties, currency fluctuations, and geopolitical tensions. Gold has traditionally been viewed as a safe haven asset, but its volatility has prompted regulatory caution.
Banks cite market volatility as the primary reason for protecting consumers from sharp price swings in the gold market, aiming to safeguard individual investors from potential losses due to extreme movements.
Chinese authorities may also be acting to regulate capital outflows into volatile assets during a period of economic uncertainty. Drawing lessons from past speculative incidents, such as the infamous oil trading debacle, regulators and banks have tightened their approach to speculative investments.
The Hong Kong Census and Data Department announced on Tuesday that China’s net gold imports through Hong Kong dropped by 4.6 per cent in October compared to the previous month and declined by 43 per cent from the previous year.
Rhona O’Connell, a StoneX Bullion analyst calls the latest figures coming out of Hong Kong interesting reading.
“The China numbers show us that Hong Kong’s net exports into China last month were down by 51 per cent against the January-September average, although the absolute Export+Re-Export numbers, at 28t, were only down by 30per cent,” said O’Connell.
O’Connell said that weak jewelry demand has driven the disconnect between Shanghai gold prices and international market prices.
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Policy shift could lead Chinese investors to reevaluate strategies
Weak demand for gold jewelry on the mainland has significantly impacted retailers like Chow Tai Fook Jewellery Group Ltd., China’s largest jewelry retailer.
The company saw its revenue fall 20.4 per cent in the half-year ending in September, the steepest drop for that period since 2016. Despite China accounting for over 80 per cent of its revenue, weak consumer confidence—driven by falling property prices and high unemployment—along with rising gold prices, discouraged purchases.
A slow recovery in Hong Kong’s tourism sector, the group’s second-largest market, further contributed to the decline. Same-store sales dropped 25.4 per cent in mainland China and 30.8 per cent in Hong Kong and Macau. To improve profitability, Chow Tai Fook reduced its sales network by 239 stores, mostly franchises.
This policy shift could lead Chinese investors to reevaluate their investment strategies. Those who view gold as a hedge against inflation or currency devaluation may need to explore other financial instruments or wait for policy changes. The restrictions could also drive some investors toward less regulated channels or increase interest in gold-related financial products like ETFs or futures, where available.
The downstream effects of tighter regulations and shifting investor sentiment on gold could reverberate through parallel gold industries, including gold mining and related sectors.
As investors adjust their strategies, reduced demand for gold-related products may lead to lower market prices, which could affect profitability for gold miners. Companies like Calibre Mining Corp. (TSE: CXB) (OTMRKTS: CXBMF), which focus on gold production, may face challenges in securing investment or financing for expansion projects if gold prices remain volatile or uncertain.
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joseph@mugglehead.com
