Gold imports by China, the world’s second-largest consumer of the precious metal after India, may increase as record jewelry demand outpaces domestic supply, the World Gold Council said.

China produced 340 metric tons of gold last year and consumption was about 700 tons, leaving a gap of 350 tons to 360 tons, Albert Cheng, Far East managing director at the council, said yesterday. “With increasing demand in China we will have to rely on imports to fill the gap between demand and supply.” China is the world’s largest gold producer.

Demand for gold jewelry gained 21 percent in the first quarter from a year ago to 142.9 tons, the highest level ever, and China became the largest investment market, the council said. Bullion jumped to a record $1,577.57 an ounce this month as investors sought a store of value amid rising inflation and concerns about the strength of the global recovery.

“Gold has taken on a new role in China amid concern about inflation,” Song Qing, a director at Lion Fund Management Co., said by phone from Shanghai. “It is increasingly being seen as an asset allocation choice. Just imagine the total wealth in China and even a small percentage of that choosing to buy gold. This demand is going to be enormous.”

China imported more than 300 tons last year, People’s Bank of China Vice Governor Yi Gang said on Feb. 26 in Beijing. The government does not publish official statistics on gold imports.
Inflation Fear

Consumer prices rose 5.3 percent in April from a year earlier, exceeding the government’s 2011 target of 4 percent for the fourth month. The People’s Bank of China has since mid- October raised interest rates four times and boosted banks’ reserve requirement ratio eight times to a record 21 percent to rein in lending and prevent inflows of capital from overseas flooding the financial system.

The culture’s deep-rooted preference for the precious metal, the impending inflationary fears in emerging markets, and limited domestic investment channels will all drive further growth in the Chinese gold demand, the council said in a report.

Investment demand has grown by an average 14 percent a year since deregulation of the market in 2001, “a trend that has continued with the strong growth momentum witnessed in the first quarter,” it said. Total gold demand in the first quarter jumped 47 percent from a year ago to 233.8 tons, the council said.

Jewelry demand has more than doubled in the last seven years to 451.8 tons in 2010, from 224.1 tons in 2004. India and China combined to contribute 63 percent of the total gold jewelry demand in the world in the first quarter, it said.