UPDATE 2-China vows to develop gold market as demand rises

* China c.bank says to let more banks to import, export gold

* Also vows to develop more gold derivatives

* Analysts say moves will help feed country's growing demand (Updates with background, market reaction)

By Rujun Shen and Simon Rabinovitch

BEIJING, Aug 3 (Reuters) - China will allow more domestic banks to export and import gold as part of steps to encourage more liquid trade, which could underpin the country's growing private demand for the precious metal.

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.

Last month, the State Administration of Foreign Exchange, which manages China's $2.5 trillion in foreign reserves, was lukewarm about gold as an investment, saying it did not offer the country a viable path to diversification.

But ordinary Chinese have displayed a large and growing appetite for gold, both as jewellery and as an investment.

And Chinese firms have been putting cash into gold production abroad.

State-owned China National Gold Group Corp. said last year that it was planning to step up its presence in central Asia, Russia and Africa to scout for new investment destinations.

Zijin Mining (2899.HK: Quote) (601899.SS: Quote) said earlier this year that it was eyeing a number of foreign mining projects for future development, with gold at the top of its most-wanted list.

PRIVATE DEMAND

Much of the demand in China has been satisfied via the domestic market until now, but the central bank's announcement suggests that Chinese buyers will start looking abroad more aggressively.

"This is largely positive news for gold," said Edel Tully, an analyst at UBS in London. "It looks like an effort to further liberalise the gold market and integrate it into China's financial framework. It indicates the importance of the Chinese gold market."

Demand from China's largest sectors -- jewellery and investment -- reached a combined 423 tonnes in 2009, with 314 tonnes supplied by domestic mines, the World Gold Council said earlier this year.

The WGC also forecast that China's gold demand will double over the next decade, driven by private demand. [ID:nTOE62S01M]

Demand from China's central bank could be more tepid.

China has increased its official gold holdings by more than 400 tonnes in the past few years to 1,054 tonnes. Yet even if it doubled that amount, gold's share of Chinese forex reserves would increase by only one or two percentage points, hence the repeated insistence by officials that bullion is not a key part of the country's diversification strategy.

The central bank's announcement lent support to gold in the international market. Spot gold XAU= was bid at $1,186.25 an ounce in Europe at 1052 GMT, up from $1,181.25 in New York on Monday.

"For the long term, of course, it will be favourable. In the short term, not really, because the technical picture of gold still looks weak," said Ong Yi Ling, an analyst at Philip Futures, adding that optimism about the global economic outlook would cap the upside for gold prices. (Additional reporting by Zhou Xin and Jan Harvey in London; Editing by Ed Lane