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China's Play For Monetary Dominance In Global Community

Updated on January 3, 2015

China Is Relentlessly Promoting Its Currency and Divorcing It from USD

Like most of the fiat currencies in the world, China's currency, the yuan, is pegged to the US Dollar, or USD. However, China is making a bid around the world to divorce its currency from the Dollar. "Up until recently, the yuan was only directly convertible into dollars and yen. But now that is rapidly changing. So far this , the Chinese government has entered into currency convertibility agreements with Australia and New Zealand"("Does China Plan to Back the Yuan with gold and make It the primary global reserve currency?"/ The business news media have paid close attention to China's relentless effort to divorce its currency from the USD. A recent Wall Stree Journal articles stated:

Bejijing 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.

Why Is China Hoarding Gold?

It would appear that China is hoarding for two primary purposes: 1. Back its currency with gold bullion, and make a case for replacing the Dollar as the World Reserve Currency, and 2. Make its currency independent from the US dollar, and in effect creating greater monetary stability for it in the event of a USD collapse. If we review the first reason, it would appear that China simply does not have enough gold at this point to make a successful case that its currency should replace the USD as the Reserve Currency. China simply does not have enough gold to back its currency. China has the 5th largest gold reserves as of late 2014. China has 1,054.10 metric tons of gold compared to the 8,133.46 metric tonnes held by the United States ("The Gold Reserves of the Largest Industrial Nations". It would literally take China another 5-10 years to match the gold reserves of the United States, unless China is deliberately misleading the world as to the amount of gold reserves that it possesses. China's currency would probably make a better Reserve Currency than the USD, if it had equivalent reserves. Some sources say that given what China has done in the past 10 years, its reserves are probably closer to 7,000 metric tonnes, and that they Chinese government is deliberately engaging in deception as it relates to their true reserves. If that is the case, then China has a trump card which it appears to be willing to play when the time is right. Even if China's reserves are half that of the United States, it would appear that they could successfully argue that the Dollar can no longer function as the Reserve Currency, given the enormous indebtedness of the United States. China owns some three trillion dollars ($3,000,000,000,000) of the reported $17,000,000,000,000 in U.S. long-term treasury notes. However, according to David Walker, CPA, former US Comptroller General of the United States, the U.S. national debt is closer to seventy trillion dollars ($70,000,000,000,000) when off balance sheet items are included in the national debt. If China is aware of this fact, then it is possible that they are getting ready to make a monetary checkmate in a game of currency chess. China maybe willing to make the argument to all who would listen that its currency should be the new World Reserve currency, given that the USD is heavily weighted down by US indebtedness, and that it is only a matter of time before it collapses under all of that debt weight. But even if China should lose its argument, and the USD is not replaced by the Yuan as the World Reserve currency, China would be protected from the potential collapse of the USD, providing that it continues building gold reserves in an effort to divorce its currency from the Dollar.

China's economy is definitely slowing down. China needs the United States to sell their goods, but China does not necessarily need the currency of the United States. The USD is a fiat currency like all of the other currencies in the global community. It can be manipulated by its central bank, the US Federal Reserve System. As a matter of fact, the Feds have constantly hit the printing presses to create artificial economic (QE I, QE II, QE III) recoveries by pumping excessive amounts of liquidity into the US economy. These monetary tools have sustained economic prosperity, and fueled record highs in the US Stock Markets. China views this as a form of economic manipulation which they have benefitted from, but what also makes them feel uncomfortable, given the excessive amount of U.S. debt that they hold. China sees as finite in nature gold, which cannot be manipulated by central banks. They know that its value can only be changed supply and demand (i.e., through mining and obtaining additional sources). "Gold means stability and independence from the USD. Independence from the USD means more sovereignty, especially in a possible USD collapse. All the recent BRIC's talk about being more independent from the USD is an example for this tendency". ("Why Is China Hoarding Gold?"

Will China Dump US Debt & Dollars?

China reportedly holds about three trillion dollars ($3,000,000,000,000) of the US estimated $70,000,000,000,000 in long treasury notes. China is affectionately called "American Bankers". Not only is America heavily indebted to China, but so are many other industrialized as well as third world countries around the world. The Chinese government seems to be always in a mood to lean money to whoever needs it, providing that they, the debtors, have something that China wants. With the United States of America, there is a ready market upon which China can dump its low quality goods. The US consumers' appetite for cheap products tends to keep Chinese workers fully employed. Thus, the Chinese have a vested interest in lending money to the US whenever US officials come calling. Despite Beijing's dual policy of amassing gold to back the Yuan for a shot at the World Reserve currency position, while possibly trying to decouple it from the Dollar, they will not call in US debts. They simply cannot run the risk of up setting US officials, who may not be willing to keep market open to a trading partner often suspected of cheating to keep its currency at relatively low levels to keep their goods cheap and affordable to US consumers.

What about the Dollar? Will China maintain high USD reserves (estimated $1.33 trillion dollars) in its central bank given their recent hoarding of the yellow metal? Does China have an incentive to maintain such high USD reserves? It stands to reason that Beijing will continuously dump dollars on the global market, or use them to acquire additional tons of gold. China can only acquire gold through two different means-buy it on the open market, or simply mind it. Despite China's mining success, they simply cannot acquire enough in the near future to match US gold reserves. Thus, they are frantically buy as much as they can to make up for the shortfalls from mining operations. Dollars can acquire any commodity, and gold is no exception. However, the Chinese will keep enough USD reserves until the Yuan is completely independent of the Dollar, which will not happen anytime soon in the near future. China needs to step up its buying and mining operations to match or exceed US gold reserves. Maybe at that point they will step up their effort to make their currency the Reserve Currency of the World. The Chinese government has friends around the world which are heavily indebted to them; maybe these friends as well as trading partners may look favorably upon China's push to dominate the global economic community with a Reserve Currency of a nation that is debt free.


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    • CliftonHRodriquez profile imageAUTHOR

      Clifton H. Rodriquez 

      3 years ago from Fort Lauderdale, Florida

      Yes, I agree. Their economy has slowed, but the Chinese government cannot afford any drastic and permanent slowing. I am convinced that their economy must expand by 4-6, or even a higher percentage per year to accommodate their growth in population. Their one child policy is not having any meaningful slowing in population growth. They have to continue to look to our markets to dump their cheap and inferior goods. They continuously cheap in every aspect of trading with us. They repeatedly keep their currency low against our currency. The Chinese officials are not stupid. They know that they must keep the masses happy and occupied with work, if they are to continue govern China. They are making friends around the world, even in my country (the Bahamas), and everywhere they go, they send their workers. Notice that they have no military advisers in many countries, but they have a massive work force.

    • profile image

      Howard Schneider 

      3 years ago from Parsippany, New Jersey

      Very interesting Hub, Clifton. China is an economic power and that power is growing rapidly. They are obviously testing their wings but even their economy has slowed recently.


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