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China’s central bank lifted temporary restrictions on gold imports imposed by some banks in a bid to defend the yuan, but that led to higher prices for the precious metal in the country.
The spread between Shanghai gold prices and London gold prices hit a record high of $121 per troy ounce last Thursday, based on publicly traded prices.
The spread narrowed to $76 on Monday after the People’s Bank of China eased restrictions on imports of the precious metal last week, according to people familiar with the informal orders issued to some state-owned and mid-sized commercial banks.
China in August reduced and stopped bank quotas on international gold imports to ease a buying spree to hedge against currency depreciation. In early September, the yuan fell to a 16-year low against the U.S. dollar following disappointing economic data.
China’s central bank issued a strong warning last week against betting on the yuan’s depreciation and rolled out measures to defend the yuan, including asset purchases by state banks and lower foreign exchange reserve requirements for banks. The yuan rebounded from lows to around 7.286 yuan against the U.S. dollar on Monday afternoon.
One person familiar with the guidance and another person who received it said the gold import restrictions were lifted on Friday. People familiar with the matter said it was unclear whether easing pressure on the yuan would lead to the lifting of restrictions.
The People’s Bank of China declined to comment.
The central bank controls the amount of gold entering the domestic market through a quota system for commercial banks. The tool is used as an unofficial mechanism to adjust metal flows and market behavior.
The gold price gap has been widening since early July. Traders and regulators say the premium is partly due to import restrictions.
The World Gold Council said in a report last week that “improving gold demand and relatively modest imports in recent months may lead to a tightening of local demand and supply conditions, pushing up local gold price premiums,” without elaborating on import restrictions.
Chinese regulators have calculated that the yuan could weaken if the gold import ban is not implemented, as a potential dollar-buying frenzy would lead to further capital outflows and put pressure on the currency, according to a person familiar with the matter.
Several market participants said the strength of the spread indicated strong domestic demand for gold in China and helped support global gold prices, which rose 0.3% to nearly $1,930 a troy ounce on Monday.
China is one of the world’s largest buyers of gold and has been adding to its reserves, with its central bank saying in August that it had been buying gold for a tenth consecutive month.
So far this year, China has imported about 900 tons of gold, the highest level in five years. Currently, gold accounts for approximately 1.38% of China’s foreign exchange reserves of US$3.16 trillion.
Gold demand in China is expected to increase ahead of the traditional wedding season in October.
“As the National Day holiday approaches, demand and consumption of gold jewelry will continue to rise,” said Ye Qianning, an analyst at Guangzhou GF Futures.
But global gold watchers remain cautious about the long-term prospects of weak investment and jewelery demand and a withdrawal of heavy buying by global central banks.
“We believe this is inconsistent with prices above $1,900 an ounce,” said Julius Baer analyst Carsten Menke. “The resilience of the global economy has not yet been fully reflected in the market, and some still believe that a recession is a strong possibility.”
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