SINGAPORE Banks have started trial gold imports directly into the Shanghai free trade zone ahead of the launch of a gold exchange there, threatening to further obscure the level of buying by the world's top consumer.
The bulk of gold bought by China used to flow through Hong Kong, making its export data a useful proxy for Chinese demand as Beijing treats data about imports of the precious metal as a state secret.
But Reuters calculations using export numbers from data provider Global Trade Information Services show that China's direct gold imports jumped to nearly 150 tonnes in the first quarter.
Excluding Switzerland, which did not disclose country specific data in 2013, direct imports nearly doubled in the period from a year ago.
The number does not provide a complete picture as some exporters do not provide gold trade data and others do not break down their exports by country.
"If gold enters China via Shanghai then it is not going to be easy anymore to draw conclusions about Chinese demand by just looking at Hong Kong data," said Carsten Fritsch, an analyst with Commerzbank AG.
The Shanghai Gold Exchange (SGE) - the world's biggest platform for physical gold trade - is in talks with foreign banks and producers on the new exchange in the city's pilot free trade zone.
The exchange is set to launch physically deliverable gold contracts, with the metal allowed to be stored in vaults in the free trade zone.
Banks had already started imports through the free trade zone, said a source at a gold-importing bank in China.
"Shanghai should play a far bigger role once the international exchange is open," said the person, who declined to be named.
SGE officials had requested that banks import through Shanghai, though no formal directive was issued, according to a second source familiar with the matter.
The request to import through Shanghai in the first quarter could be in part to trial the new vaults in the free trade zone, said the source.
SGE did not respond to requests for comment.
SHANGHAI VS HONG KONG
Hong Kong has historically been the gateway for gold into China, as Chinese banks buy gold from foreign banks that have branches and vaults there.
From Hong Kong, the gold then heads across the border to Shenzhen to SGE's vaults. But with the new exchange in the free trade zone, foreign banks, refiners and mints could send directly to the mainland.
While direct imports are still less than those from Hong Kong - which exported 287 tonnes to the mainland in the first quarter - the pace at which they are growing will make it more difficult to use the Hong Kong figures as a proxy for Chinese demand.
Chinese imports from Hong Kong fell to a 14-month low in April, fanning a belief that demand in the country was weak after last year's record purchases, but some of the fall could be explained by increased volumes going through Shanghai.
"It's going to become tricky to know anything about gold in China now," said a trader in Hong Kong. "There is no doubt going to be some confusion understanding their buying pattern."
(Editing by Ed Davies and Michael Urquhart)