What in the world is China up to? Why are the Chinese hoarding so much gold? Does China plan to back the yuan with gold and turn it into a global reserve currency? Could it be possible that China actually intends for the yuan to eventually replace the U.S. dollar as the primary reserve currency of the planet? Most people in the western world assume that China just wants a “seat at the table” and is content to let the United States run the show. But that isn’t the case at all. The truth is that China doesn’t just want to compete with the United States. Rather, China actually plans to replace the United States as the dominant economic power on the planet. In fact, China already accounts for more global trade than the United States does. So what would happen one day if China announced that it was backing the yuan with gold and that it would no longer be using the U.S. dollar in international trade? It would cause a financial shift so cataclysmic that it is hard to even imagine. Most of those that write about the “death of the U.S. dollar” usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned. China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States. Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative. But a gold-backed yuan would change all of that very rapidly.
And without a doubt, the Chinese government has already been very busy promoting the use of the yuan in international trade. In a recent note, John McCormick of RBS Group stated the following…
Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD 5-6 billion daily – double what they were a year ago.
A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.
For China, having a global reserve currency is not just about economics. It is also about power.
McCormick ended his recent note this way…
China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound.
But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.
Similar sentiments were echoed in a recent article in the Wall Street Journal…
Beijing is undertaking a long, gradual campaign to establish the yuan as a more market-oriented, international currency. China‘s State Council, or cabinet, said in a statement this month that the country would draft a plan to allow the yuan to become fully convertible. Meanwhile, the People’s Bank of China is guiding the currency higher and set the median point of its permitted daily trading band last week at the strongest level ever.
We don’t hear much about these sorts of things in the western media, but the convertibility of the Chinese yuan is a very big deal. Up until recently, the yuan was only directly convertible into dollars and yen. But now that is rapidly changing. So far this year, the Chinese government has entered into currency convertibility agreements with Australia and New Zealand.
So instead of having to change yuan into U.S. dollars to trade with Australia and New Zealand, now China can cut U.S. dollars completely out of the process.
But right now there is nothing that really gives the Chinese yuan a significant competitive edge over the U.S. dollar. If Chinese authorities truly want the yuan to end up replacing the U.S. dollar as the primary reserve currency of the planet, they need to do something that will make the rest of the world want to use it.
And they could do that by backing the yuan with gold. In fact, there are persistent rumors that China has been busily preparing for that.
For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush, is claiming that China has plans to turn the yuan into “a hard, gold-backed currency” that will have a distinct competitive edge over the rapidly depreciating paper currencies that the rest of the globe is currently using…