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 Beijing continues to
see a role for gold in world finance
China's
announcement that it has more than doubled its official gold holdings
to over 1,000 tonnes is significant as much for the politics of its
timing as for the news itself. Indeed it is only one of several
recent announcements made to position China for greater influence as
the world financial system faces the prospect of its biggest changes
since the 1971 Smithsonian Agreement.
The more than doubling
from 454 to 1054 tonnes in 2002 when it last gave figures is not
exactly surprising. Even allowing for a more than doubling in the
gold price over that time, gold's percentage in China's
reserves has not changed significantly. Currently valued at some $30
billion, gold is still only a fraction of reserves of US$1.9
trillion.
Nor would China have
had to be a buyer in international markets. It is now the world's
second largest gold producer, having overtaken South Africa, and so
it would have made sense for the People's Bank of China to
absorb some of that production rather than sell it and acquire even
more dollars. Keeping some mine production off the market would also
have helped boost the gold price.
But the increase has
probably been gradual and does not indicate that China sees itself as
champion of an intentional return to some sort of gold standard.
However, the fact that it has chosen to announce it now clearly
indicates its desire to gain a louder voice, and to indicate that it
favors the continuation of some international role for gold.
That is now a matter
both of self interest and of concern about the long term value of the
dollar and other fiat currencies in which it holds reserves. Its
official holdings are now surpassed only by the United States,
Germany, France, Italy and Switzerland. China's citizens have
also become significant buyers. It is not clear how far it favors the
IMF selling any of its gold. Last year the People's Bank of
China governor, Zhou Xiaochuan
was on an International Monetary Fund panel which
recommended selling 400 tonnes of its gold -- 20 percent of its
holdings – to generate cash for lending to members. However,
the turmoil of the past months may have changed China's mind,
and those of other large gold holders.
Other significant
recent announcements are intended to gradually increase the role of
the yuan in international trade and investment. China cannot
realistically expect to be a major player until such time as its
currency is fully convertible and sufficiently used in trade to make
other countries want to hold it in their reserves.
The yuan has in fact
been used in cross border cash transactions for a number of years, in
Hong Kong and Macau and in neighboring regions of Russia and Vietnam.
However, for the first time its official use in trade between Hong
Kong, Macau and ASEAN neighbors and the border provinces of China,
plus the Yangtze delta, is to be permitted. This is particularly
important for Hong Kong, which will also gain the advantage of being
the main place of settlement for such trades, providing a boost to
its banking industry.
However, it is easy to
exaggerate the immediate impact of this development. Hong Kong's
trade with the mainland mostly involves imports of good for outward
processing and exports of finished products to other countries.
Almost all of this will continue for the foreseeable future to be
denominated in dollars, and in some cases yen or euros.
The dollar may seem
fundamentally weak and a poor store of value but it reigns supreme as
a transaction currency, particularly in Asia. Even were the yuan to
be fully convertible and the all trade permitted to be settled in it,
it would take a long time for it to become significant. There was a
time when it was believed that the yen would play a major role in
Asian trade denomination and settlement. But though it is significant
for some of Japan's exports, particularly to Japanese-owned
factories in Southeast Asia, it is not otherwise widely used.
Indeed, East Asia's
years of trade surpluses act against its currencies becoming more
international as others have limited opportunity to acquire them.
Meanwhile US profligacy has created a huge supply of dollars which
lubricates global trade.
Huge US external
deficits may be on the wane and Japan and even China may find
themselves in external deficit, in which case they may want to
finance that by encouraging others to hold their currency. But for
now at least that is not the case.
Indeed, while China
remains in large surplus, any yuan acquisition by foreigners will
simply add to its holdings of dollars – not a good bargain.
This also explains why
the development of offshore yuan bond markets will be slow. For sure,
some small issues have been made through Hong Kong by mainland
entities. It now looks likely that Hong Kong banks will be able to
issues yuan bonds to fund their mainland operations. But China's
desire to develop its international financial role is constrained by
what the stability-focused leadership in Beijing may see as the
macro-economic disadvantages, at least in the short term, of
increasing capital movements which would complicate money supply and
exchange rate policies.
A significant gesture
more than practical help is also a definition which could be applied
to China's swap agreements with other central banks including
Korea, Indonesia and Argentina. These are supposed to help protect
the smaller economies from currency attacks and panics. Indeed they
would be very useful if China were swapping excess dollars for their
domestic currencies. But while yuan may look good on the balance
sheet, for market intervention purposes it is largely irrelevant
unless converted into dollars.
Use of the yuan will
grow as China offers long term yuan-based funding for big ticket
exports such as power stations. However, borrowers are likely to be
wary, even if terms appear attractive, fearing that the yuan is
destined for a sustained period of revaluations like the yen in the
1970s and 80s.
In short China's
recent announcements about gold, the role of the yuan and its
concerns about the dollar have two main aims. Firstly, at the global
level to strengthen its hand in dealing with the west over changes in
the financial system and its representation in the IMF in particular.
And secondly at the regional level to emphasize its role as leader in
efforts to enhance cooperation in East Asia through the ASEAN+3 group
and related arrangements such as the Chiang Mai Initiative on central
bank and currency cooperation.
The long term
implications are enormous but it is easy to exaggerate the short term
impact.
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Economics/Business 
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