Gold Backed Yuan Not What China Wants

While the idea of a gold backed Yuan makes great headlines, it’s likely not what China wants.

Bullion.Directory precious metals analysis 11 November, 2014
By Terry Kinder
Investor, Technical Analyst

There are plenty of other places where you can read a blow by blow account of why the author believes that China wants a gold backed Yuan, so I won’t go into the argument in favor of the idea. Instead, let’s take a look at the broad outline of what China’s concerns are and interpret their actions in light of those concerns.

1. China is widely reported to be accumulating large amounts of gold.

2. China holds a large amount of dollar denominated assets such as U.S. Treasuries.

3. Given the relatively large size of China’s economy it feels it is not fairly represented in international monetary arrangements.

4. China is concerned with the U.S. government debt levels. They fear that the U.S. may seek to either inflate its currency or devalue the dollar in order to reduce its debt burden. This would result in the loss of significant amounts of money for China.

5. China believes power and influence are too heavily tilted toward the U.S. and would like a system that takes the interests of China into greater consideration.

Given China’s concerns above, it could choose various courses of action. For example, China could choose to dump it’s U.S. Treasuries quickly in order to get out from under them as soon as possible and crash the U.S. Dollar.

However, China can’t dump massive amounts of U.S. Treasuries on the market without harming its own economy. So, the more logical thing to do would be to slowly unwind its dollar position through a combination of selling treasuries and purchasing other things. Those other things can by anything – real estate, gold, businesses, etc.

So, instead of seeking to establish a gold backed Yuan, China may be looking to do something simpler, get rid of its dollar denominated holdings in order to diversify. This would also make sense in light of China’s desire to move the world monetary system toward multilaterlism rather than domination by the U.S. and Europe.

Gold Backed Yuan Conclusion:

There is plenty of evidence that what China wants is to be included in the SDR. In a recent article JC Collins discussed the possibility of a SDR gold standard.

To me Collins’ idea makes much more sense than the idea of a gold backed Yuan. At this point and time I believe China is trying to nudge the system rather than overturn the apple cart. At this point it probably does China more harm than good to directly confront the United States.

The Yuan is nowhere near ready to take over as the world reserve currency even if the Chinese wanted it to. It will likely be a decade, perhaps much longer, before China is able to create the institutions and liberalize their system enough for the Yuan to be more than a trade currency.

Despite what many believe China is more than likely not moving toward a gold backed Yuan, but rather for inclusion of the Yuan within the SDR and a more multilateral world monetary system that takes into account what China wants.

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