The Industrial and Commercial Bank of China (ICBC) Standard Bank is among the world’s largest, if not the single largest bank in the world. It has been one of the key benefactors and beneficiaries of the ascendancy of the People’s Republic as a global power. Now, the bank is joining in on the trend of China gaining greater influence in the precious metals market.
Entering London Bullion Market
In addition to China adding incredible amounts of gold bullion to its national reserves, the country has made a variety of other forays into the international precious metals market. First, Chinese firms acquired major gold mining projects in South Africa and other resource-rich foreign lands. Then, the country expanded its importance in the gold trading markets by introducing the Shanghai Gold Exchange in 2014.
As a major player in both the gold and silver markets, it only makes sense that China’s largest financial institutions would make the jump into the epicenter of the precious metal trade: London’s Inner City. ICBC purchased one of London’s major gold vaults from Deutsche Bank as the German firm was exiting its seat from the prestigious (though controversial) London Gold Fix. The Bank of China (BOC) eventually filled this vacated seat.
Not to be outdone, ICBC took two steps of its own to enter the London bullion market. The bank was reclassified as an official London Bullion Market Assocation (LBMA) Market Maker, a label that only 13 banks in the world can boast. It means that ICBC “must offer two-way quotations in both gold and silver to the other Market Makers throughout the London business day.” Next, the bank secured a spot on the London Silver Fix. This means that China is represented in both price-setting procedures in addition to an emergent yuan-denominated fix.
Up and Down
Beyond making inroads with the LBMA, ICBC has made strides toward expanding its business in the Asia-Pacific region. One of the keys to this strategy is establishing a stronger foothold in Hong Kong, which remains the central financial connection between Asian and Western markets. By setting up a subsidiary known as ICBC Asia to operate in Hong Kong, the bank hopes to not only penetrate a lucrative market but also increase its profitability.
However, the story has not been entirely filled with successes for China’s banks. In addition to constant murmurs about the country’s debt-to-GDP levels, both ICBC and Bank of China have been forced to cut their dividends. This was mainly due to taking on non-performing loans that ate into the two firms’ profit margins. According to Bloomberg, “ICBC had 179.5 billion yuan [$27.76 million] of nonperforming loans as of December, an increase of 44 percent from a year earlier.”
The chart above traces the rising levels of bad loans in the People’s Republic. This problem is hardly isolated to these two stalwarts, but ICBC and Bank of China are perhaps hit harder than other banks in China similarly dealing with bad loans because of their large size.
At any rate, the emergence of China as an integral component in the gold and silver markets is key to the country’s broader strategy of diversifying away from the U.S. dollar.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.