China is currently the largest producer of gold in the world and it is also the largest consumer. In recent years, the country increased its amount of gold imports, which was met with much media attention. In 2009, China had 31 metric tons of net gold imports, but even this is a limited amount.
The People’s Bank of China (PBOC) issued a joint statement with three economic policy agencies on Tuesday, stating that it will permit more banks to import and export the precious metal. Gold analysts say this sends a clear message that China wants to increase its presence in the world’s gold market. However, it may not be on the import side of the table.
According to gold analyst Hu Yanyan with Shanghai’s Everbright Futures, the statement “…addresses areas that the industry has widely regarded were ‘blind spots’ in how the government has viewed the sector to date.” Government restrictions regarding the trade flow of gold bullion was one of these blind spots. Since 2002, when the government established the Shanghai Gold Exchange, this situation created a roadblock to deepening the gold market.
Ms. Hu believes that the ability for other commercial banks to engage in gold trading will increase China’s demand for gold, creating positive movement in gold prices. Currently, gold ranks as one of the most thinly traded commodities listed on the Shanghai Futures Exchange. One gold trader employed by a state-owned bank said, “Given that volumes in the futures markets are pretty small, the PBOC wants the state-owned commercial banks to diversify their trading methods.”
The country’s lobby for gold has long placed pressure on its government to increase its volume of gold holdings. However, some traders believe that this latest announcement is likely not a cover tactic for such action. They feel it was designed to stimulate gold trade in the Chinese market rather than an attempt by the country to diversify its foreign reserves.
Source: Yap, Chuin-Wei. The Wall Street Journal.com. PBOC to Allow More Gold Trading by Banks.