China's moves to free up its gold market open the way for foreign players and local banks to tap growing demand for the precious metal, offering citizens a more attractive investment and promising to boost the country's clout over global prices.
With the Shanghai Composite Index down 20 percent this year, and gold prices still up 9 percent despite a correction from a lifetime high hit in June, more retail investors are buying bullion as they diversify their wealth.
A clampdown on rampant property speculation could also drive investors to shift some hot money into gold, which many see as a sign of status and good fortune, as hopes for more Chinese demand pushed gold to a two-week high above $1,200 an ounce this week.
"What's happening in China right now is that a lot of wealth is being switched out of the property markets into the gold market," said Mark Pervan, senior commodities analyst at ANZ in Melbourne.
"This is an ongoing theme. This theme is likely to put a very high floor of price on the gold market. The property investor is very concerned the government is trying to cool that market. They've made a lot of money in property."
Investors have long bet that China will eventually overtake India as the world's top consumer, and Beijing's move to allow more domestic banks to export and import bullion underscores the hunger for gold among the country's burgeoning middle class.
More foreign firms are likely to become members of the Shanghai Gold Exchange and analysts also expect Beijing to ease curbs on gold investment products such as exchange traded funds.
Although China is the world's largest gold producer, it still requires imports as demand can easily outstrip domestic output by more than 100 tons annually.
China's share of global gold demand jumped to 11 percent in 2009 from 5 percent in 2002, when the Shanghai Gold Exchange opened, and consumption is likely to double in the next decade from around 420 tons as income grows, the World Gold Council says.
The People's Bank of China said on Tuesday 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.
China is likely to let second-tier institutions such as Minsheng Banking and China Merchants Bank join forces with four major state banks, including Bank of China, that are already allowed to offer such services, bringing the number to at least eight.
"China's gold market is going to play an important role in the global gold market," said Albert Cheng, Far East managing director of the World Gold Council.
"It will become more accessible for both international and domestic players. Investors in China will benefit from greater availability of physical gold and gold-related financial products. Naturally this is very positive for gold."
Analysts say China wants more banks to trade with overseas counterparts, reduce their reliance on the Shanghai Gold Exchange for hedging and invite more foreign banking institutions to trade on the Exchange, where trading volumes have risen by more than half in the first half of this year.
Five banks, including HSBC and Standard Chartered, are members of the Shanghai Gold Exchange.
Most gold investors trade via the Exchange but banking sources say more clients are chasing products such as gold saving accounts and gold bars while hedging services to miners have gone up, suggesting a shift from equities or property markets.
Beijing has repeatedly stressed its determination to curb speculative demand and rein in overly fast price rises in the real estate market despite a slowdown in economic growth.
"Investment demand for gold is expanding very fast, as we are now in a bull market and prices will rise in the mid- and long-term," said a wealth manager specializing in precious metals at a state bank in Guangzhou.
"No matter if it's the stock, property or gold market, Chinese people always flock in when prices are rising."
Will China boost reserves after announcing the new measures? The answer may be no because Beijing will focus on bringing more gold into the country to satisfy demand, rather than stirring up global prices through official purchases.
China has increased its official gold holdings by more than 400 tons in the past few years to 1,054 tons, the world's sixth largest.
"The PBoC comments should not be taken as a sign the official sector will buy gold, but rather that current restrictions on gold imports and gold investment products, such as exchange-traded funds, will gradually ease," HSBC said in a report.
Indeed, business is booming in downtown Beijing.
"There has been a big jump in interest in gold over the past year," said Zhang Qi, a salesman surrounded by gold commemorative items on display in a store of China Golddeal, the country's only official minting company, on Financial Street.
"Everybody can see how the government is trying to control the real estate market, so there is more confidence that gold is something that will be able to hold its value. Parents want to pass gold on to their children because they think it is safe."
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