Yuan Internationalization Requires Increase In Gold Reserves

I present another intriguing translation, this time from an article by Tan Weihuan “China Gold News” Chief Researcher on the internationalization of the renminbi. What I find interesting is that according to the author China or any other of the BRICS countries in the short term are not interested in a gold backed currency (I share his opinion). There is a difference between backing and supporting a currency with gold. Backing means a fixed price, for example one gram of gold is one yuan. For China a gold backed renminbi is completely unrealistic at this point because the renminbi is still in it’s infancy – capital controls need to be lifted, full convertibility needs to implemented, etc. Next to the fact that the Chinese would have too little influence over the exchange rate of a gold backed renminbi should it be in full effect any time soon, which is nor desirable.

However, China has a great interest to support the renminbi with gold, having an x amount of tonnes at the PBOC, to give their currency trust and credibility. This is needed for the renminbi to be accepted worldwide. The euro and the dollar wouldn’t be reserve currencies if they weren’t supported by thousands of tonnes of gold. It’s very clear the Chinese recognize the monetary value of gold and the purpose it serves in financial markets, but they take it one step at a time. For the years to come the schedule of the PBOC is to accumulate gold mainly for the internationalization of the renminbi (compete the US dollar) and to diversify and hedge their exorbitant US dollar reserves. At the same time the Chinese government is stimulating its people to hoard gold for wealth preservation.

Though I’m convinced gold will officially return into the global monetary system within five to ten years, as all fiat roads are a dead end, in what way remains to be seen. There are many types of gold standards and it also depends if the transition will be led top-down or bottom-up.

Translated by Soh Tiong Hum.

Internationalization Renminbi Requires Increase In Gold Reserves

Author: Tan Weihuan “China Gold News” Chief Researcher | Source: China Gold Network 2014/3/21.

To internationalize the renminbi increasing gold reserves is a very important condition because it can increase the world’s confidence in the RMB and expand its circulation.

When central bank governor Zhou Xiaochuan talked about the internationalization of the renminbi (RMB) recently, he pointed out: “Pace and timing of RMB internationalization will not be pre-arranged…making the internationalization of the RMB happen is a long process.” This reflects the country has considered the complexity and difficulty of internationalizing the RMB.

As we know, the US takes the initiative in global financial markets by imposing the US dollar on the whole world, and greatly benefits from this position. When the financial crisis came, the US escaped by printing money massively yet did not suffer inflation because the Dollar is the main reserve and trade currency in the world.

Although China holds nearly $4 trillion in foreign exchange reserves and more than a trillion dollars in US Treasury bonds at the moment, the RMB’s influence in the world is very small, not matching China’s position as the world’s second largest economy. RMB internationalization is a long process so we need to look at it historically. The RMB was not a hard currency in the past, wishing that it can quickly become an important currency to compete with the Dollar and the Euro is not practical. The euro was transformed from currencies such as the Deutsche Mark and French Franc so it already occupied a large market share. The RMB was developed from scratch so naturally needs sufficient time to build trust and a base for use. At the beginning of last century it took the US a long time to overtake the currency hegemony from Britain. At this moment the strength of China and that of United States is still far apart.To internationalize the RMB, increasing gold reserves is a very important condition because it can increase the world’s confidence in the RMB and expand its circulation.

I do not think it is desirable as some people said, to establish a BRICs bank on a gold standard. That is because implementing a gold standard implies that our country has to combat the volatility of the international gold market; the RMB would fluctuate along with the price of gold. Historically, only the post-WWII US was able to peg its currency to gold because the US held 70 percent of the world’s central bank gold reserves, over 20,000 tons of gold and economic strength in pole position. But as other countries developed their economic strength after the war, the gold standard became a burden for the US. When gold price was high, other countries sent their gold to the US to exchange to dollars; when the gold price was low, they bought gold from the US. After a lot of money printing, the US lost its gold and eventually had to remove the gold-peg.

The essence of RMB internationalization is exporting the Yuan, that is to exchange paper currency for goods. Other countries wanting to hold the Renminbi must offer goods to exchange, whereas China is just paying money – which is like writing a promissory note. China aims to win market share predominantly from the US dollar, slowly but surely. Too quickly and the US will resist strongly; it needs to be done slowly and steadily like a boiling frog. Therefore Zhou Xiaochuan said this will be a long process.

Since China is going to benefit, we should also let other countries benefit (a win-win situation), unlike the US which is passing the buck; buying foreign assets when the dollar is strong and then buying back dollars when it is weak, thereby passing financial and economic crises to other countries.

In Gold We Trust