New policy seen increasing China's gold demand, supporting prices

Section:

People's Bank of China to Allow More Gold Trading by Banks

By Chuin Wei-Yap
The Wall Street Journal
Tuesday, August 3, 2010

http://online.wsj.com/article/SB1000142405274870449960457540700031819199...

BEIJING -- China said it will let more banks import and export gold, the government's clearest signal yet that it plans to increase the country's presence in the global gold market.

China, the world's biggest producer and consumer of gold, has increased gold imports in recent years as the central bank has boosted gold reserves and as domestic interest in gold investment has grown. Still, with net imports totaling 31 metric tons in 2009 by private-sector estimates, the volumes are still relatively limited. China doesn't officially disclose imports of gold bullion.

The statement, issued jointly by the People's Bank of China and three other economic-policy agencies, came after Asian trading hours Tuesday. Gold futures on the Comex division of the New York Mercantile Exchange for September delivery were up $3.70, or 0.3%, at $1,187.10 an ounce in midday trade.

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"This statement is the clearest spelling out of the government's attitude toward developing the gold market," said Hu Yanyan, a gold analyst with Everbright Futures in Shanghai. "It addresses areas that the industry has widely regarded were 'blind spots' in how the government has viewed the sector to date."

Among these "blind spots," Ms. Hu said, government restrictions on the trade flow of bullion had been an obstacle to deepening the market since the government's establishment of the Shanghai Gold Exchange in 2002.

"If other commercial banks can now enter gold trading, that's likely to enhance our country's demand for gold, which would be supportive of prices," Ms. Hu said.

Gold is one of the most thinly traded commodities on the Shanghai Futures Exchange.

"Given that volumes in the futures market are pretty small, the PBOC wants the state-owned commercial banks to diversify their trading methods," said a gold trader with a state-owned bank.

China's gold lobby has long pressured the government to raise its gold holdings, but the gold trader said Tuesday's statement likely isn't a cover for such a move. "I don't think it has anything to do with diversifying China's foreign reserves, but rather to stimulate gold trading in the domestic market," she said.

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