Bei­jing pre­par­ing for role in global fi­nance by the end of the year

The China Post - - COMMENTARY - BY THANONG KHANTHONG

It will be an in­ter­est­ing time this Oc­to­ber when the main­land re­veals its trump card. And when it does so, it might lead to a wake- up call for the global fi­nan­cial mar­kets.

As part of its ap­pli­ca­tion for the Chi­nese yuan to join the bas­ket of cur­ren­cies of the In­ter­na­tional Mon­e­tary Fund, main­land China will have to dis­close its to­tal gold re­serves.

Since 2009, it has not up­dated the ac­tual fig­ure of its gold re­serves, which should have in­creased sharply from the pub­licly re­ported 1,054 tonnes.

Bloomberg re­cently is­sued an ar­ti­cle es­ti­mat­ing the main­land’s gold re­serves should triple to 3,510 tonnes, mak­ing it the world’s sec­ond-largest holder of gold re­serves af­ter the U.S.’ 8,133.5 tonnes — if the U.S. still has its gold at all.

Main­land China wants to be­come a global player in fi­nance. Firstly, it will have to in­clude the yuan in the IMF’s bas­ket of cur­ren­cies, which cur­rently is made up with the U. S. dollar, the Bri­tish pound, the euro and the Ja­panese yen.

Rec­og­niz­ing the size and scale of the Chi­nese econ­omy, Christine La­garde, the IMF’s man­ag­ing direc­tor, has thrown her full sup­port be­hind the en­try of the yuan in the IMF’s bas­ket of cur­ren­cies.

Once the yuan joins the rank of the global cur­ren­cies, its cred­i­bil­ity and stand­ing in the global mar­ket­place will in­crease sub­stan­tially.

Plac­ing the yuan in the IMF’s bas­ket of cur­ren­cies is the first step for main­land China to in­ter­na­tion­al­ize its cur­rency.

‘Big way’

So far, the main­land has been mov­ing cau­tiously to pre­pare the de­but of the yuan in the in­ter­na­tional mar­ket­place. How­ever, when it floats the yuan, it would want to do it in a big way.

Hav­ing a lot of gold in its US$ 4 tril­lion re­serves is a pru­dent way to back the yuan at a time when dis­trust in the global fiat cur­ren­cies is grow­ing.

With ma­jor cen­tral banks of the world print­ing their cur­ren­cies like crazy, the main­land will opt to cre­ate an im­pres­sion of a more sta­ble yuan backed by huge gold re­serves.

The world’s cur­ren­cies are pa­per-based, with­out any hard as­set back­ing like in the time of the gold stan­dard or sil­ver stan­dard.

Some spec­u­late that the main­land’s gold re­serves might range be­tween 3,000 tonnes to 8,000 tonnes, putting it on par with the level of the U. S.’ gold re­serves.

There could be a se­cret game go­ing on and Jim Rickards, au­thor of “The Death of Money,” said in an in­ter­view some time ago that an or­derly trans­fer of gold from the West to China has been un­der­way.

Since China is the largest cred­i­tor of the U.S., it is not happy that the U. S. has re­sorted to money print- ing to prop up its fi­nan­cial sys­tem.

Money print- ing hurts the value of the U. S. dollar. Main­land China would f ace a l oss from its huge U.S. Trea­suries of more than US$1 tril­lion. To per­suade China not to sell off its dollar hold- ings, the U.S. ar­ranges for China to get its hand on the gold — at a rea­son­able price level — hence a ram­pant price ma­nip­u­la­tion.

By mak­ing the gold price rel­a­tively cheap, the main­land has an in­cen­tive not to rush to dump the U.S. Trea­suries. At the same time, a lower gold price won’t hurt the dollar. For, the gold price is the anti-the­sis of the value of the dollar. This ar­range­ment has been go­ing on in the af­ter­math of the 2008 fi­nan­cial cri­sis. Pre­sum­ably the game will end af­ter China can at least rack up its gold re­serves to at least the same level with the U. S.’ gold hold­ings.

Af­ter that the gold price will be al­lowed to move freely. There is a pos­si­bil­ity that the gold price will shoot through the roof once the mar­ket re­al­izes how much gold the main­land ac­tu­ally has ac­cu­mu­lated through the years.

If the main­land were to hold 10 per­cent of its in­ter­na­tional re­serves in gold, it will have at least 10,000 tonnes of gold sit­ting in its backyard.

‘Go fever­ish’

Once it makes this an­nounce­ment of its gold re­serves, the fi­nan­cial mar­ket will go fever­ish. Of course, fund man­agers or cen­tral banks would like to in­crease their yuan as­sets to di­ver­sify the risk.

Look at the bond mar­ket in Europe, where neg­a­tive yields are ram­pant. The wealth ef­fect is be­ing de­stroyed. The U.S. bond mar­ket and eq­uity mar­ket have been in­flated to peak bub­bles.

We have seen sev­eral mea­sures to pre­pare China’s role in global fi­nance be­fore the end of this year.

First, main­land China will an­nounce its gold re­serves, which should range some­where be­tween 3,000 tonnes to 8,000 tonnes.

Sec­ond, it will ap­ply to have its yuan in­clude in the IMF’s bas­ket of cur­ren­cies.

Third, it has at­tracted 57 coun­tries to join its ini­tia­tive to launch the Asia In­fra­struc­ture In­vest­ment Bank. This devel­op­ment bank will com­pete against the World Bank and the Asian Devel­op­ment Bank.

And it will be lend­ing money to de­vel­op­ing na­tions in yuan to fi­nance in­fra­struc­ture projects. The U. S. and Ja­pan have been left out in the cold, while other ma­jor Euro­pean na­tions have de­cided to join the AIIB.

Fourth, the Shang­hai Gold Ex­change might start to quote the gold price in yuan in­stead of in U.S. dollar.

Fifth, it will be launch­ing its China In­ter­na­tional Pay­ment Sys­tem to sup­port the in­ter­na­tion­al­iza­tion of the yuan through the global bank­ing net­work.

Sixth, it might be able to buy oil in yuan or yuan, cre­at­ing petroyuan to com­pete head-on against the petrodol­lar, which has dom­i­nated the global oil mar­ket since 1973.

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