November 5, 2015 / 11:40 AM / 4 years ago

REFILE-China's gold investment at risk as Beijing frees yuan

(Repeats, corrects spelling of additional reporter’s name, removes instrument code)

* China investors have no direct access to overseas assets

* Graphic-China gold imports:

By Clara Denina

LONDON, Nov 5 (Reuters) - Appetite for gold in China, which accounts for one fifth of global investment demand, could fall in the long term as the country moves to free the yuan, enabling savers to gain direct access to foreign stocks or bonds.

In its latest five-year plan last month, a blueprint for China’s economic and social development, Beijing committed to liberalise its capital account in the Shanghai free trade zone, as part of efforts to making the yuan more convertible.

It also plans to expand its role in international trade and investment.

Freer capital flows eventually would involve freedom of movement of cash and by implication freedom of movement of gold.

Officially, Chinese individuals have no direct access to overseas assets, such as bonds, stocks and real estate but can only invest in six government-approved foreign brokerages. Investors are allowed to hold gold bars but can’t export them.

“One of the arguments that you hear frequently about why Chinese buy, relatively speaking, so much gold is that their ability to invest in other things is limited, primarily because they have no access to overseas,” ICBC Standard Bank strategist Tom Kendall said.

“Relaxation of those controls could generate a substantial increase in the volume of gold flowing out of the country and arguably might have a detrimental effect on domestic investment demand for the metal,” he said.

China, the world’s second-largest consumer of gold, accounts for one fifth of global investment demand at 166.4 tonnes in 2014, according to the latest data from the World Gold Council.

“China’s investors are quick learners, they absorb a lot of financial news and become increasingly more sophisticated in their choices,” Jiang Shu, chief analyst at Shandong Gold Group in Shanghai said.

“During the past five-six years some people have said that because there are few investment channels or products in China, a lot of money enters the gold market,” Shu said.

China’s restrictions on the movement of capital have partially impacted Chinese gold flows over the last decade, with imports far outweighing exports, ICBC’s Kendall said.

China’s gold imports via main conduit Hong Kong reached a record 1,158.16 tonnes in 2013 and stood at 813.13 tonnes last year. The country can only export gold in the form of jewellery and artefacts but not bars for investment purposes.

“Gold has a very unique position at the moment in the investment possibilities that are open to Chinese citizens,” said Philip Klapwijk, director of Precious Metals Insights in Hong Kong.

“The direction of travel is quite clear but the speed is unclear, it is not going to happen quickly but it is not a gold friendly environment in the long run,” he added. (Additional reporting by A. Ananthalakshmi in Singapore. Editing by David Evans)

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