By Tom Miles and Eadie Chen

BEIJING (Reuters) - China's gold demand is expected to double over the next decade due to jewellery consumption and investment needs, the World Gold Council (WGC) said in its first report on the world's fastest growing consumer of the metal.

Currently the world's second-largest gold consumer after India, China has seen its gold demand grow at an average rate of 13 percent per year over the past five years.

Demand from China's two largest sectors -- jewellery and investment -- reached a combined total of 423 tonnes in 2009, with 314 tonnes supplied by domestic mines.

"This shortfall creates a snowball effect as China's gold industry may not be able to keep pace with the annual leap in domestic consumption despite rising to be the world's largest gold producer since 2007," WGC said in the report.

"We are actually very conservative," the WGC's Far East managing director Albert Cheng told Reuters in an interview.

"The growth is based on the wealth accumulated by the Chinese population. The more important thing is that Chinese central policy is more looking inward at domestic consumption, expanding into the west to bring them up to the level of a coastal city."

China's per capita consumption of gold jewellery is one of the lowest, at 0.26 grams, when compared with other major gold consuming countries. If gold were consumed at the same rate per capita as in India, Hong Kong or Saudi Arabia, annual Chinese demand could increase by at least 100 tonnes or as much as 4,000 tonnes in the jewelry sector alone, it said.

Cheng estimated China's total stock of gold at about 5,000 tonnes and said the figure was low because Chinese people had only been allowed to buy gold in the last 20 years.

Also, the surge in the gold price from about $250 per ounce 10 years ago to over $1,100 per ounce now had already drawn out much of the gold available for recycling.

"Anybody who has unwanted jewellery, I would say that they would have already sold. The next trigger is that the price has to go very high, say $1,500, then you will trigger people to sell some marginal jewellery."

Any recycled gold supply could be absorbed by China's State Administration of Foreign Exchange (SAFE), part of the central bank, which revealed a year ago that it had stocked up 454 tonnes of gold since 2003, bringing its total reserves to 1,054 tonnes.

Cheng said he didn't know when SAFE might provide a further update, since last year's revelation was partly prompted by a reporting requirement to the International Monetary Fund (IMF).

The IMF is offering 191.3 tonnes for sale, but SAFE's top manager Yi Gang has said he will be prudent.

Cheng said the message was clear: "China is not going to buy the IMF gold."

The regulatory environment for gold in China is easing, Cheng said, with a prohibition only on the import and export of gold bars. Even that trade was permitted by the four licensed major banks, which could always get approval if they needed it, which keeps the Shanghai market in line with global prices.

"Whether this will be totally removed, no, I don't think so in the near future, because gold is a currency and the currency is not fully convertible at the moment. Until then, gold will still remain in the hands of the central bank."

Many investors expect SAFE to keep buying gold to raise gold's share of China's total reserves, which stood at $2.4 trillion at the end of 2009.

If the central bank boosts gold holdings to 2.2 percent of forex reserves, a peak level seen in 2002, from the current 1.6 percent, China's total incremental demand would rise by 400 tonnes at the current gold price, the WGC report said.

China's share of global gold demand doubled from 5 percent in 2002 to 11 percent in 2009, and the council predicted that China's domestic gold mines could be exhausted within six years.

"The Chinese gold industry is simply not responding fast enough to bring in new supply," it said.

(Editing by Ken Wills and Michael Urquhart)