China will allow more domestic banks to export and import gold as part of steps to encourage more liquid trade, which could underpin the country's growing private demand for the precious metal. The People's Bank of China said on Tuesday that it would allow banks to hedge bullion positions in overseas markets; urge banks to lend more to domestic gold firms looking to go abroad; and actively develop more yuan-denominated gold derivatives.
"Demand shows that basically they don't have enough gold for themselves. Their production is not good enough to meet their demand," said Ellison Chu, managing director of precious metals with Standard Bank in Hong Kong. "The demand will be increased naturally if there are more and more investment tools related to gold," he added.
China is the world's largest producer of gold and second largest consumer of the metal after India. Chu called it a natural step for the Chinese government to launch this kind of programme and said that the country's gold market would be opened up step by step.
In a statement on its website, the central bank also said it was researching whether to allow foreign institutions to participate in gold trading in the Chinese market, but gave no timeline or details for how that might happen. "The policy will help China's gold market to grow rapidly. China's demand for gold has been growing strongly, and that demand will need to be satisfied," said a senior official at a large Chinese bank, who declined to be named.
Gold investors have long viewed Chinese demand as a boon for the precious metal, especially if retail-level trade opens wide enough to allow local exchange-traded funds or offshore investment products now largely restricted - though the government has downplayed its own demand prospects. Last month, the State Administration of Foreign Exchange, which manages China's $2.5 trillion in foreign reserves, was lukewarm about gold as an investment, saying it did not offer the country a viable path to diversification.