Chinese banks wary of Venezuelan gold swaps – sources

Jun 23, 2016 - 10:10 AM GMT

Attempts by Venezuela’s central bank to arrange gold swap deals with China have foundered while the South American country lurches from crisis to crisis, sources told FastMarkets.

State-owned banks in China are usually the targets of Venezuela for gold swaps – central banks use gold swaps to get cash from large financial institutions in exchange for lending gold during specific periods – due to their strong funding, a mining source in China said.

But there is an unwillingness to lend while the country’s economy is on the brink of collapsing.

“They contacted our overseas branches a while ago but the discussions stopped recently,” a banking source in China told FastMarkets. “There are too many risk factors involved in this kind of business – Venezuela is not a conflict area but it’s a high-risk area.”

The top four state-owned commercial banks in the country – the so-called “big four” – are Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China.

Venezuela has been selling its gold reserves since March 2015 – it sold 88 tonnes in 2015 and 43 tonnes in the first quarter of this year, International Monetary Fund (IMF) statistics showed.

“Not only as it is the first annual reduction in gold from the country since 2005 but it opposes the fairly recent repatriation of gold in 2011 under the late president Hugo Chávez, where gold was deemed as a diversification asset away from the US dollar and a safe haven against economic instability,” Société Générale analyst Robin Bhar said.

In 2011, Chávez ordered the repatriation of most of the country’s gold stored overseas to Caracas.

The country now holds roughly 230 tonnes, making it the world’s 22nd-largest holder of the metal, according to the World Gold Council. This fall was partly due to a swap agreement for $1 billion in cash with Citi, according to speculation.

The country – a major oil exporter – is struggling with massive inflation and recession caused by a slump in oil prices as well as food and power shortages. It is being forced to sell its gold reserves because it “has limited other resources to fall back on at present”, Bhar added.

And according to media reports, Venezuela earlier this year exported $456 million of physical gold – around 373,000 ounces or 10.6 tonnes to the Bank for International Settlements (BIS) in Switzerland in exchange for cash.

As well as BIS, Venezuela’s central bank was reportedly in negotiations with Deutsche Bank for a similar cash-swap deal.

Venezuela has long been in recession but this has worsened since mid-2014 after the slump in crude oil prices – Brent crude oil fell to its lowest in 13 years in January this year. Around 95 percent of its export earnings are generated by oil.

The IMF has forecast that the Venezuelan economy will shrink by eight percent this year, with inflation forecast to exceed 1,600 percent.

China is the largest creditor of Venezuela – it has loaned the country $65 billion since 2005. The government is said to be seeking a grace period on its debt with a deferral on principal repayment, SP Angel noted.

(Editing by Mark Shaw)