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“All warfare is based
on deception” Sun Tzu, 500B.C.
China has the deepest
historical appreciation of the dangers of paper money and yet they embrace it
like there is no tomorrow.
Have they, like their
Western contemporaries, learnt nothing from history? Or are they in fact not
only learning from history but from the current mess they see on the other
side of the world?
Perhaps, this was all part
of the reform process.
When it comes to their
economic future, China’s holdings of US debt and their covert gold investmentprogramme are two commonly
discussed areas of China’s financial arrangements.
Mainstream America, most
likely as a result of the election debates, seems incensed at the
‘currency manipulation’ game being played out by the Chinese.
Meanwhile those interested
in gold investment are watching, with some awe,
the rate at which both the Chinese government and citizens are stocking up on
gold. It’s sometimes like those of us in the West are pointing at
China’s gold numbers whilst shouting back at our own central bankers
‘Have you seen this?! Are you not asking why they are doing this? It won’t
go away you know!’
Bringing gold investment history to the future
In China we possibly have a
country which has learnt how to get the best from various monetary systems
which have passed through history.
China’s economic
liberalization began in 1978, just 7 years after the West’s modern
monetary system was set loose.
Since then it can attribute
its 100-fold economic growth to its cheap manufacturing and exports. Wealth
has increased within the country, with a huge expansion of the middle class
which is estimated to account for around 100 million Chinese people. The cheap
exports are, in recent years, thanks to the artificially low yuan and also
due to China’s record buying of US Treasuries (vendor financing).
China, has like all rapidly
growing countries, experienced high inflation in the last decade or so. This
was to be expected and, as we all know, is present (whether official or not)
in virtually all nations which have embarked on huge government spending
programmes to boost the economy i.e. US and the UK.
China hasbenefited hugely
from crass, loose monetary policies in the West, most undoubtedly from the US
from whom China holds over $1 trillion worth of debt. But they have been
clever, not only do they hold the world’s biggest currency manipulators
by the cajones, but they are also stocking up for when the US really screw up
their currency.
Vendor financing is all good
until the buyer/borrow’s debts get too big and interest burdens cripple
their ability to keep participating.
The Chinese are wisely
cutting down on US debt and they are buying gold.
Holding the stars and stripes
With or without gold,
Beijing has big plans for reforming the monetary system. They have been busy
encouraging the use of the yuan in cross border transactions. This is not
just to reduce transaction costs for trading partners, it has more strategic
effects. Namely to reduce the ‘exorbitant privilege’ enjoyed by
the US as a result of running the world’s reserve currency and
favourable post-war economic conditions over 40 years.
According to a Reuters article last month, Beijing are keen
to see greater competition in the international currency markets
“competition among major currency issuers and a wider menu of options
when investing, trading or seeking a store of value would produce better
results for the world economy…with more alternatives, the margin for
the U.S. would be greatly narrowed, which will certainly weaken the power
basis of the U.S.”
Needless to say the US
dollar still holds supremacy and therefore China must be careful how it goes
about transforming the face of internationally traded currencies. At present
there really is no obvious alternative to the dollar. Any hostile moves
towards the US dollar will impact China’s immediate wealth
significantly, not to mention any easily US enforced embargoes as seen
currently in Iran.
But why would China want to
do this considering they hold over $1 trillion of US Treasury holdings?
Earlier in the summer
Reuters viewed documents which showed the PBOC had been given direct a
computer link, by the US Treasury, to buy US debt in June 2011 as opposed to
going via Wall Street.
But something else started
happening in June 2011, China began to reduce its holdings of US Treasuries
and has been doing so ever since; last month there appeared to be little
buying interest at all with Japan’s US Treasury holdings set to
overtake China’s.
As Dan Amoss tells us, and
is reiterated by Zerohedge’s graph below, ‘Chinese leaders
acknowledge that the country already has enough U.S. Treasuries, and have
allowed their Treasury portfolio to shrink slowly in recent months.’
 
China are no longer as
concerned with holding US debt as they once were, China has been fed up with
the US’ treatment of the dollar for some time, their enthusiastic
purchase of US debt in the past is the only reason the US has been able to
keep going for so long. As the Communist country develops its infrastructure,
education and industry a cheap yuan is no longer the only way to increase
growth.
The reduction in US Treasury
holdings by China is one of many on-going moves by Beijing to make their own
and the international monetary system more stable and competitive.
Beat the dollar with gold investment
Whilst demand for most
commodities in China has been sapped somewhat thanks to the global slowdown,
the same cannot be said for gold. And it is at the forefront of financial
change in China.
In 2011, gold demand in
China increased by 20% and accounted for 21% of global demand according to
the World Gold Council. In the first half of this year the country overtook
India as the world’s biggest gold consumer – with expectations
that China will increasingly gap India as a gold buyer.
Holding gold is, as we all
know, a hedge for the un-backed paper currency. Not only is China highly
exposed to the US Dollar, it is also exposed to the falling fortunes of the
Western world and of course, the swing back from their own.
With the deepest memory of
the dangers of paper money it is not surprising domestic demand for gold is
said to be ‘only just the beginning’.
Last week, as part of the
fanfare around the Chinese Communist Party Congress the government announced
it aims to double income per capita by 2020 from 2010 levels. This is likely
to only be achieved by pursuing fiscal and monetary actions which may help
growth and income in the short term, but in the long term will be highly
supportive of precious metal prices and demand.
Alongside this increased
income the government are also making it easier for citizens to invest in gold.
Eight years ago the PBOC
Governor laid out a plan to integrate gold into the financial system. This was
reiterated in Monday’s speech by the current general director of
China’s central bank who reminded the audience of the ‘very
important’ role played by gold in the formation of the financial market
system.
Next month, the Shanghai
Gold Exchange will launch an interbank market which will start with spot
contracts before gradually offering forward contracts. On a more
accessible level major Chinese banks allow investors to contribute a small
amount of money each month in order to gradual accumulate gold and silver
month by month. Eventually the investor is able to take physical delivery.
The international gold-backed yuan
Much of the chatter since
the LBMA conference this week has been around China’s desire to
increase its gold reserves to levels similar to the US’s. With levels
of only 2% compared to the US’s 75%, the country will have a long way
to go. If this is what they’re doing (it is) then who can blame them
for keeping it quiet (they haven’t disclosed details on gold holdings
since 2009). It would not be in their interest to announce a desire to buy a
few thousand tonnes of gold, it would send the price of gold sky high and the
value of those US dollar denominated US treasuries into a black hole.
Even for those who have just
clocked onto China’s voracious appetite for gold, it is not a surprise
theory that they are preparing the yuan as the new global reserve currency,
either alongside or instead of the US Dollar.
For many observers this
seems an impossible feat, particularly if they expect to compete on a
gold-backed basis. But, as Laurie Williams points out, ‘at current
annual production and import levels, between them reaching around 1250
tonnes, and rising, this could be achievable in a far shorter time than many
have anticipated.’
A few years ago a task force
was set up which the aim of looking at increasing China’s gold
reserves. As Zerohedge report, State Council advisor ‘Ji’ was
quoted saying in 2009, ‘We suggested that China’s gold reserves
should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10
years.’
Earlier this week,
conveniently in the mists of the Communist Congress, the China Securities
Journal featured a commentary from Goa Wei, a key government official. He
writes ‘China needs to add to its gold reserves to ensure national
economic and financial safety, promote yuan globalization and as a hedge
against foreign-reserve risks.’ He believes the current gold reserves
are ‘too small’.
The measures put into place
by the government to assist gold’s role in the financial system
show the Chinese government’s way of picking up on the increasing
demand for gold-backed products and physical gold and
‘facilitating’ them. Moves such as those mentioned above are
taking China in the right direction to become the world’s largest holders
of gold.
Earn paper, invest in gold
Whilst China seems to have
enjoyed the fruits of Keynesian and Westernised economic arrangements, they
know not to reinvest it into similar theories.
They used purchases of US
debt to boost demand for cheap manufacturing; they’ve reinvested some
of that money into developing more superior industries and infrastructure.
Their people are wealthier but they are encouraged to buy gold.
China seems to be firmly on
the path to global power, and they are working hard to make sure that path is
paved with golden economic stability. They have achieved what they wanted to
and they are now investing in gold, fully aware of the sharp edge Western
economies are currently balancing on. Whether this results in an
international reserve currency system, who can tell, but whatever happens
China seem to be getting a better understanding of where to put their wealth
compared to the rest of us.
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