“All warfare is based on deception” Sun Tzu, 500B.C.
China has the deepest historical appreciation of the dangers of paper money and yet they embrace it like there is no tomorrow.
Have they, like their Western contemporaries, learnt nothing from history? Or are they in fact not only learning from history but from the current mess they see on the other side of the world?
Perhaps, this was all part of the reform process.
When it comes to their economic future, China’s holdings of US debt and their covert gold investment program are two commonly discussed areas of China’s financial arrangements.
Mainstream America, most likely as a result of the election debates, seems incensed at the “currency manipulation” game being played out by the Chinese.
Meanwhile those interested in gold investment are watching, with some awe, the rate at which both the Chinese government and citizens are stocking up on gold. It’s sometimes like those of us in the West are pointing at China’s gold numbers while shouting back at our own central bankers “Have you seen this?! Are you not asking why they are doing this? It won’t go away you know!”
Bringing Gold Investment History to the Future
In China we possibly have a country which has learned how to get the best from various monetary systems which have passed through history.
China’s economic liberalization began in 1978, just seven years after the West’s modern monetary system was set loose.
Since then it can attribute its 100-fold economic growth to its cheap manufacturing and exports. Wealth has increased within the country, with a huge expansion of the middle class which is estimated to account for around 100 million Chinese people. The cheap exports are, in recent years, thanks to the artificially low yuan and also due to China’s record buying of US Treasuries (vendor financing).
China, has like all rapidly growing countries, experienced high inflation in the last decade or so. This was to be expected and, as we all know, is present (whether official or not) in virtually all nations which have embarked on huge government spending programs to boost the economy i.e. US and the UK.
China has benefited hugely from crass, loose monetary policies in the West, most undoubtedly from the US from whom China holds over $1 trillion worth of debt. But they have been clever, not only do they hold the world’s biggest currency manipulators by the cajones, but they are also stocking up for when the US really screw up their currency.
Vendor financing is all good until the buyer/borrow’s debts get too big and interest burdens cripple their ability to keep participating.
The Chinese are wisely cutting down on US debt and they are buying gold.
Holding the Stars & Stripes
With or without gold, Beijing has big plans for reforming the monetary system. They have been busy encouraging the use of the yuan in cross border transactions. This is not just to reduce transaction costs for trading partners, it has more strategic effects. Namely to reduce the ‘exorbitant privilege’ enjoyed by the US as a result of running the world’s reserve currency and favorable post-war economic conditions over 40 years.
According to a Reuters article last month, Beijing are keen to see greater competition in the international currency markets “competition among major currency issuers and a wider menu of options when investing, trading or seeking a store of value would produce better results for the world economy…with more alternatives, the margin for the US would be greatly narrowed, which will certainly weaken the power basis of the US”
Needless to say the US dollar still holds supremacy and therefore China must be careful how it goes about transforming the face of internationally traded currencies. At present there really is no obvious alternative to the dollar. Any hostile moves towards the US dollar will impact China’s immediate wealth significantly, not to mention any easily US enforced embargoes as seen currently in Iran.
But why would China want to do this considering they hold over $1 trillion of US Treasury holdings?