Why gold demand is surging in China?

Chinese gold demand is expected to exceed 700 metric tons in the next several years and sharply outpace domestic production. Annual gold production in China, world’s second largest consumer of precious metal, is expected to reach 400 tonnes by 2014 with demand at 700 tonnes, signaling room for a strong ramp up in imports.

Chinese gold demand grew by 32 percent despite a concurrent 25 percent rise in the annual average local currency gold price. For the first three months of the year, China's investment demand more than doubled to 90.9 tons compared to India's 85.6 tons.

Unlike in other countries, the demand for gold in China was being driven by mainly its population's cultural affinity to the yellow metal. Most of China's gold output stays in the country where it is transformed into jewelry and manufactured items as buying and gifting the gold is an integral part of their culture.

Also gold and its colour has a special significance in Chinese culture as it is a symbol of good luck and the colour of the attires of the emperors. The colour is used as mourning colour for Chinese. Gold is also used in the dragons which are legendary representation in the Chinese civilization.

Hedge against inflation:

The other main reason behind the surging demand is concern over domestic inflation pressure and poor performance of alternative investments, combined with expectations of further gold price gains.

The expectation for higher inflation has fueled great interest among investors to hold physical gold, which led to higher imports. People see gold as a hedge against inflation as the country’s tightening monetary policy drives investors from stocks and properties to gold.

If China wants the yuan to become a global reserve currency, holdings of gold should be increased to match the United States. China has only 1,054 tonnes of gold compared to United States 8000 tonnes of gold in reserve.

China has more than $2.5 trillion in reserve and dollars are its biggest asset. So they can use that reserve for radically increasing their store of gold.

Chinese local gold production is insufficient to supply the retail and institutional market as well as the central bank. So Beijing has encouraged retail consumption by expanding the number of banks allowed to import bullion.