China lifts temporary curbs on gold imports as renminbi recovers

China’s central bank has lifted temporary curbs on gold imports that were imposed on some lenders in a bid to defend the renminbi but caused the price of the precious metal to rise in the country.

The spread between the Shanghai gold price and London hit a record $121 per troy ounce last Thursday, according to calculations based on public traded prices.

The spread narrowed to $76 on Monday after the People’s Bank of China relaxed curbs on imports of the precious metal last week, said people familiar with the informal order given to some state and midsized commercial banks.

China in August had reduced and stopped granting quotas for international gold imports by banks to ease a rush in purchases to hedge against a weaker domestic currency. The renminbi fell to its lowest point against the dollar in 16 years in early September after the release of disappointing economic data.

China’s central bank issued a strong warning against bets on renminbi depreciation last week and has rolled out measures to defend the currency, including state bank purchases and lowering foreign reserve requirements at banks. The currency has bounced back from its low to trade around Rmb7.286 against the dollar on Monday afternoon.

The gold import curbs were lifted last Friday, said one person familiar with the guidance and another person who received the instructions. It was not clear if the easing pressure on the renminbi led to the restrictions being lifted, said the people.

The PBoC declined to comment.

The central bank controls how much gold enters the country’s domestic market through a system of quotas given to commercial banks. The tool is used as an unofficial mechanism to adjust metal flows and market behaviour.

The gap in the gold price has been steadily widening from early July. Traders and regulatory insiders said the premium was partially due to the import curbs.

“Improving gold demand and relatively tepid imports in recent months may have led to local demand and supply conditions tightening, pushing up the local gold price premium,” said the World Gold Council in a report last week, without elaborating on the import curbs.

Chinese regulators calculated that the renminbi may have been weaker if the gold import ban was not in place, because a potential buying frenzy in dollars would cause further capital outflows and put the currency under pressure, according to a person with knowledge of the discussions.

The strength of the spread showed healthy domestic demand for gold in China, according to several market participants, helping to support global bullion prices, which rose 0.3 per cent on Monday to almost $1,930 per troy ounce.

China is among the top global buyers of gold and has been raising its reserves, with the PBoC saying in August that it had bought gold for the tenth month in a row.

So far this year, China has imported about 900 tonnes of gold, which is the highest in five years. At present, gold accounts for about 1.38 per cent of China’s total foreign exchange reserves of $3.16tn.

Gold demand in China is expected to increase ahead of the traditional wedding season in October.

“With the National Holiday looming, the demand and consumption for gold accessories will continue to rise,” said Ye Qianning, an analyst with GF Futures in Guangzhou.

But global gold watchers remained cautious about the long-term outlook over softening investment and jewellery demand and central banks globally pulling back from high levels of purchases.

“In our view, this is at odds with prices above $1,900 per ounce,” said Carsten Menke, an analyst at Julius Baer. “The resilient global economy is not yet fully reflected in the market, as some still consider a recession as very likely.”