Gold Imports by China May Increase After Investment Demand Overtakes India

Gold imports by China may increase after investment demand more than doubled in the first quarter, with the country overtaking India to become the largest market for gold coins and bars, the World Gold Council said.

China produced 340 metric tons of gold last year and consumption was about 700 tons, leaving a gap of 350 tons to 360 tons, Albert Cheng, Far East managing director at the council, said yesterday. “With increasing demand in China we will have to rely on imports to fill the gap between demand and supply.” China is the world’s largest gold producer and second-largest in overall consumption.

China’s investment demand jumped 123 percent to 90.9 tons in the first three months, compared with an 8 percent rise to 85.6 tons for India, the council said. Bullion jumped to a record $1,577.57 an ounce this month as investors sought a store of value amid rising inflation and concerns about the strength of the global recovery.

“Gold has taken on a new role in China amid concern about inflation,” Song Qing, a director at Lion Fund Management Co., said by phone from Shanghai. “It is increasingly being seen as an asset allocation choice. Just imagine the total wealth in China and even a small percentage of that choosing to buy gold. This demand is going to be enormous.”

China imported more than 300 tons last year, People’s Bank of China Vice Governor Yi Gang said on Feb. 26 in Beijing. The government does not publish official statistics on gold imports.

The country’s total gold demand in the first quarter jumped 47 percent from a year ago to 233.8 tons, the council said. That still lags behind Indian consumption of 291.8 tons, according to the council.

Inflation Fear

China’s consumer prices rose 5.3 percent in April from a year earlier, exceeding the government’s 2011 target of 4 percent for the fourth month. The People’s Bank of China has since mid-October raised interest rates four times and boosted banks’ reserve requirement ratio eight times to a record 21 percent to rein in lending and prevent inflows of capital from overseas flooding the financial system.

“The headline number is above 5 percent, yet some Chinese consumers feel much higher inflation in their day-to-day life,” Lion Fund’s Song said. “Inflation, coupled with concern about uncertainties in the global recovery, is fueling demand.”

The culture’s deep-rooted preference for the precious metal, the impending inflationary fears in emerging markets, and limited domestic investment channels will all drive further growth in the Chinese gold demand, the council said in a report. Demand for gold jewelry gained 21 percent in the first quarter from a year ago to a record 142.9 tons.

Investment Demand

Investment demand has grown by an average 14 percent a year since deregulation of the market in 2001, “a trend that has continued with the strong growth momentum witnessed in the first quarter,” it said.

Jewelry demand has more than doubled in the last seven years to 451.8 tons in 2010, from 224.1 tons in 2004. India and China combined to contribute 63 percent of the total gold jewelry demand in the world in the first quarter, it said.

The metal increased 5.8 percent this year after a 30 percent rally in 2010, keeping it on course for an 11th straight annual advance. Immediate-delivery bullion gained 0.6 percent to $1,502.75 an ounce at 5:13 p.m. in Shanghai.

--Rong Feiwen. With assistance from Dieter Depypere in Beijing. Editors: Richard Dobson, Jake Lloyd-Smith

To contact Bloomberg News staff for this story: Feiwen Rong in Beijing at +86-10-6649-7563 or frong2@bloomberg.net

To contact the editor responsible for this story: Jim Poole at jpoole4@bloomberg.net

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