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