Gold demand in China, which overtook India two years ago to become the world's biggest consumer of the yellow metal, declined by 12 percent during the first quarter of this year to 241.3 tonnes, a report said.
Gold demand in China during the first quarter of 2015 stood at 275.4 tonnes, the World Gold Council's 'Gold Demand Trends' report said.
Jewellery demand fell by 17 percent during the quarter to 179.4 tonnes compared to 216.3 tonnes in the same period of 2015, following a slowing economy.
"Demand for gold jewellery in China fell in Q1 as appetite for gold jewellery was curbed by the sharply rising gold price against a background of continued economic slowdown," the report said.
Despite receiving a lift in January and early February due to the Chinese New Year festivities, jewellery demand tailed off sharply in the second half of the quarter.
The sector suffered marked losses as China's relatively anaemic economic performance weighed on consumer sentiment, it said.
A supply-side crunch further hampered China's jewellery market. A new national standard for hallmarking of gold jewellery (the National Gold Standard Mark) came into force on May 4, which requires that all gold jewellery of 99 percent purity be hallmarked as 'Chuk Kam'.
During March, retailers nationwide were busy adjusting their inventories in order to replace existing stocks with inventory that complies with the new requirements, in time for the early May deadline.
This surge in stock replacement activity led to a temporary supply squeeze that intensified the slump in demand, the report said.
"The supply of gold jewellery in China came under further pressure as lines of available capital were constrained.
During the quarter, domestic banks tightened the conditions under which they will lend to jewellery manufacturers and retailers," it added.
However, investment demand for bars and coins went up by 5 percent to 61.9 tonnes compared to 59.1 tonnes in the same period of 2015, encouraged by Chinese New Year festive purchasing and the rising gold price.
A number of major commercial banks reported increases in sales of gold investment products, although regional differences were seen, with robust demand in the east of the country countered by relatively subdued demand in the south, the report said.
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