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

As part of its application for the renminbi to join the basket of currencies of the International Monetary Fund, China will have to disclose its total gold reserves. Since 2009, China 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 China’s gold reserves should triple to 3,510 tonnes, making it the world’s second-largest holder of gold reserves after the US’ 8,133.5 tonnes – if the US still has its gold at all.

China wants to become a global player in finance. Firstly, it will have to include the renminbi in the IMF’s basket of currencies, which currently is made up with the US dollar, the British pound, the euro and the Japanese yen. Recognising 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 renminbi in the IMF’s basket of currencies. Once the renminbi joins the rank of the global currencies, its credibility and standing in the global marketplace will increase substantially.

Placing the renminbi in the IMF’s basket of currencies is the first step for China to internationalise its currency. So far, China has been moving cautiously to prepare the debut of the renminbi in the international marketplace. However, when it floats the renminbi, China would want to do it in a big way. Having a lot of gold in its $4-trillion reserves is a prudent way to back the renminbi at a time when distrust in the global fiat currencies is growing. With major central banks of the world printing their currencies like crazy, China will opt to create an impression of a more stable renminbi 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 China’s gold reserves might range between 3,000 tonnes to 8,000 tonnes, putting it on par with the level of the US’ gold reserves. There could be a secret game going on between China and the US. Jim Rickards, the 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 US, it is not happy that the US has resorted to money printing to prop up its financial system. Money printing hurts the value of the US dollar. China would face a loss from its huge US Treasuries of more than $1 trillion. To persuade China not to sell off its dollar holdings, the US 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, China has an incentive not to rush to dump the US 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 US’ 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 realises how much gold China actually has accumulated through the years. If China were to hold 10 per cent 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 renminbi assets to diversify the risk. Look at the bond market in Europe, where negative yields are rampant. The wealth effect is being destroyed. The US 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, China will announce its gold reserves, which should range somewhere between 3,000 tonnes to 8,000 tonnes.

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

Third, China 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 renminbi to finance infrastructure projects. The US 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 renminbi instead of in US dollar.

Fifth, China will be launching its China International Payment System to support the internationalisation of the renminbi through the global banking network.

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