The People's Bank of China said on Tuesday that it would allow banks to hedge bullion positions in overseas markets; urge banks to lend more to domestic gold firms looking to go abroad; and actively develop more yuan-denominated gold derivatives.

"Demand shows that basically they don't have enough gold for themselves. Their production is not good enough to meet their demand," said Ellison Chu, managing director of precious metals with Standard Bank in Hong Kong.

"The demand will be increased naturally if there are more and more investment tools related to gold," he added.

China is the world's largest producer of gold and second largest consumer of the metal after India.

Chu called it a natural step for the Chinese government to launch this kind of programme and said that the country's gold market would be opened up step by step.

In a statement on its website, the central bank also said it was researching whether to allow foreign institutions to participate in gold trading in the Chinese market, but gave no timeline or details for how that might happen.

"The policy will help China's gold market to grow rapidly. China's demand for gold has been growing strongly, and that demand will need to be satisfied," said a senior official at a large Chinese bank, who declined to be named.

Gold investors have long viewed Chinese demand as a boon for the precious metal, especially if retail-level trade opens wide enough to allow local exchange-traded funds or offshore investment products now largely restricted - though the government has downplayed its own demand prospects.

Eoin Treacy's view China has come a long way since Mrs.Treacy's grandfather had to throw gold bars into the sewer for fear of being found with them by the communists and branded a capitalist. Those days are now a distant memory and China is the world's largest producer of the metal. Retail investors can purchase gold bars at ICBC and other bank branches and it would seem to be only a matter of time before ETFs backed by physical metal are made available. A Chinese subscriber I met in Shanghai in May told me that he loved the tangible sensation of literally holding gold bars and that this added to his sense of financial security. I suspect he is not the only person to feel this way about the yellow metal.

Chinese investors are short of vehicles in which to put their cash. Whereas in other countries, people have recourse to an active corporate bond market, China's is relatively under developed which leads people to speculate primarily in property and stocks. Gold is a welcome additional avenue for investors but greater progress is needed before the domestic financial market can be deemed to offer the breadth of choice required by increasingly sophisticated investors.

Gold denominated in Yuan has attempted to break through the CNY8500 area three times since December. It found support in the region of CNY7825 last week but needs to sustain a move back above CNY8175 to break the short-term progression of lower rally highs and indicate demand is regaining the upper hand.