18 July 2013

China Reported Planning To Back the Yuan With Gold

This is an interesting article for several reasons, not the least of which is that it is from a Russian publication and perspective, reflecting on the possible actions of China in the evolution of the global reserve currency regime.

As you know Russia is promoting a rethinking of the post Bretton Woods monetary system through their chairmanship of the G20 this year.   There are other shoes to drop yet from that.

I suspect that China is playing chess here, or perhaps more appropriately the game of 'Go,' and not checkers. So snap judgements about what they are doing and why they are doing it are probably going to be fairly shallow.  Most professionals and so-called experts are blinded by the status quo, lost in their own jargon and assumptions.  There are many mechanics, but fewer systems thinkers. 

Every action that is public masks a myriad of moves and countermoves done off the board and in quiet.  Most who comment fail to grasp this because of cultural predilections.

Thoughts about capitalists selling rope do come to mind among other things relative to the short term and self-serving, stupidly greedy nature of the markets these days.  But to borrow a phrase, economic power grows out of the barrel of a gun.  It can call most hands.

Among other things the price discovery mechanism for gold currently resides with the Anglo-American financial establishment, which has been fairly shameless of late in shoving prices around the plate using paper leverage, and fixing key prices at will whether they reflect reality or not.   That will have to be addressed.  And I suspect it is well underway.

The terms of 'redeemability,' if any, are obviously of paramount importance in such a value reference to gold, as well as currency markets that are notorious for predatory practices, whether one wishes to acknowledge the rigging or not.

I am giving this more thought and will have other things to say about it in the future.  But these are undeniably interesting times.

China reportedly planning to back the yuan with gold
July 17, 2013 special to RBTH Asia Pacific

Recent media reports suggest that Beijing is considering backing the yuan with gold. This decision, if taken, will likely affect China's economy and may trigger a new wave of the global economic crisis. For Russia, however, such a scenario may have its benefits.

According to media reports of early July, the People's Bank of China is mulling the possibility of phasing out the dollar as the reference currency for the yuan exchange rate, and to start using gold as the reference point.

The reports have not been confirmed officially, but analysts are warning that the step, if taken, will weaken the yuan and destabilise China's already troubled economy, ultimately provoking a new bout of the economic crisis worldwide.

Beijing's possible move to back the yuan with gold would not be meant as a strategic measure to strengthen the national currency and increase its attractiveness as an investment medium. Rather, it would be a flaunt aimed at demonstrating to the world (and to the USA in particular) that China is capable of taking the risks associated with a departure from the dollar standard. Experts warn however that, apart from benefiting no-one, such a decision may actually have catastrophic consequences.

Separating the yuan exchange rate from the US dollar may further weaken the American currency in the long run; in addition, China's monetary policy would become very much restricted, believes Evgeny Nadorshin, chief economist at AFK Sistema.

"The yuan will start fluctuating severely against the dollar and other major reserve currencies. This will affect the Chinese economy, which currently has serious problems as it is: the export revenues are falling, and the statistics for freight traffic and electricity consumption indicate a significant slowdown in business activity," says Aleksandr Golovtsov, head of the research department at UralSib Asset Management.

Given the current economic recession in China, backing the yuan with gold may further worsen the situation. In essence, China is running the risk of launching a new wave of the global economic crisis, experts concur...

Read the rest of the article here.