Yuan's global ambitions beg golden question
IT WILL be an interesting time this October when China reveals its trump card. And when it does, it might lead to a wake-up call for the global financial markets.
As part of its application for the yuan to join the basket of currencies of the International Monetary Fund (IMF), 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 published an article estimating that China's gold reserves should have tripled to 3,510 tonnes, making it the world's second-largest holder of gold reserves after the United States' 8,133.5 tonnes - if the US still has its gold at all.
China wants to become a global player in finance. First, it will have to get the yuan included in the IMF's basket of currencies, which currently comprises 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 yuan in the IMF's basket of currencies.
Once the yuan joins the ranks of the global currencies, its credibility and standing in the global marketplace will increase substantially.
Placing the yuan in the IMF's basket is the first step for China to internationalise its currency.
So far, China has been moving cautiously to prepare the debut of the yuan in the international marketplace. However, when it floats the yuan, China would want to do it in a big way.
Having a lot of gold in its US$4 trillion (S$5.3 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, China 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 China's gold reserves might range between 3,000 tonnes and 8,000 tonnes, putting it on a par with the level of the US' gold reserves.
There could be a secret game going on between China and the US. 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 under way.
As China is the largest creditor of the US, it is unhappy that the US has resorted to printing money to prop up its financial system.
Printing money hurts the value of the US dollar. China would face a loss from its huge US Treasuries of more than US$1 trillion. To persuade China not to sell off its US dollar holdings, the US arranges for China to get its hands on the gold - at a reasonable price.
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 will not hurt the US dollar, for the gold price is the antithesis of the value of the US 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 of 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 has actually accumulated through the years.
If China were to hold 10 per cent of its international reserves in gold, it would have at least 10,000 tonnes of gold sitting in its backyard.
Once it makes this announcement on 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 US bond market and equity market have been inflated to peak bubbles.
There are several ongoing and future measures to prepare China for its role in global finance before the end of this year.
First, China will announce its gold reserves.
Second, China will apply to have its yuan included in the IMF's basket of currencies.
Third, China has attracted 57 countries to join its initiative to launch the Asia Infrastructure Investment Bank (AIIB). 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 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 yuan instead of the US dollar.
Fifth, China will be launching its China International Payment System to support the internationalisation of the yuan through the global banking network.
Sixth, China might be able to buy oil in yuan, creating petroyuan to compete head-on against the petrodollar, which has dominated the global oil market since 1973.
THE NATION/ASIA NEWS NETWORK