Wednesday, February 19, 2014

Jim Rickards On China's Gold Accumulation & Currency Strategy

The following is a piece from an excellent interview at The Epoch Times with Jim Rickards discussing China's gold accumulation strategy and their strategy for the next global currency system.

Mr. Rickards: What is going on in Shanghai is very significant. Suffice to say that China is the coming world gold power. In terms of the world monetary system, Shanghai is becoming the center of world gold trading as opposed to London and putting these two things together, you have to ask yourself why?
Epoch Times: Why?
Mr. Rickards: I think they see something most people don’t. The international monetary system based on paper currencies is fragile and likely to collapse, and when the system needs to be reformed, the people with the largest voice at the table will be the people with the most gold.
Epoch Times: Right, but even including this frantic buying, the Chinese have a lower percentage of their money supply reserved in gold than the United States.
Mr. Rickards: I agree with that, which tells me they will keep buying. I think they have acquired three or four thousand tons secretly, but I don’t think they are done.
Epoch Times: Can China supply the world with a reserve currency?
Mr. Rickards: Not with the yuan. A: They don’t want to open their capital account. B: The yuan can’t possibly be a global reserve currency. It is expanding in use as a trade currency, but most people don’t understand the difference between a trade currency and a reserve currency. The trade currency is just a way of keeping score in the balance of payments mechanism.
If you are Brazil and China, and Brazil agrees to take yuan for Brazilian goods, and China agrees to take reals in exchange for Chinese goods, that’s fine. Then you just keep score and settle up every now and then. That’s a trade currency.
But to be a reserve currency means that countries that have reserves have to invest it in something, so you need a deep liquid pool of investable assets. China does not have that. There is no Chinese bond market. There are a few Dim-Sum bonds and a few other things, but there is no Chinese government bond market to speak of, and it would take 10 to 15 years to develop one.
But it’s not just about issuing debt. China doesn’t have to borrow because they have too many reserves. If they don’t borrow then there are no bonds, and if there are no bonds there can’t be a reserve currency because there is nothing to invest in.
Even if they did, there is no rule of law in China, so why would you trust the Chinese not to steal your money? So putting all that together, they are not even close to being a reserve currency.
Epoch Times: So what are the Chinese up to?
Mr. Rickards: What China wants is the SDR [Special Drawing Right, a type of money for governments], because it’s not the dollar. It’s issued by the IMF [International Monetary Fund], and China is simultaneously lobbying for more votes in the IMF.
China is trying to use its willingness to lend money to the IMF to purchase SDR notes from the IMF to give the IMF money to bail out Europe. It’s trying to use that as a lever to get more votes. If it has more votes, it would be comfortable using the SDR as a reserve currency, because its use would be regulated by the membership and that would make China the second largest member after the United States.
The United States is opposing it, but Christine Lagarde [Head of the IMF], is pushing very hard to increase the Chinese role. It’s a complicated global game.
If you said to me, does China want to get rid of the dollar as the global reserve currency, the answer is yes. But most people think it’s that they want the yuan. They don’t. It’s the SDR.
Epoch Times: What can the United States do about the money owed to China?
Mr. Rickards: All we have to do is inflate our currency and pay them back in cheaper dollars and that reflects a wealth transfer from China to the United States. So China is completely vulnerable to that, which is why they are buying gold to create a hedge.
If we inflate, then gold will go up. So what they lose on the paper, they make on the gold.
More from Jim Rickards on the continued strength of the euro vs. other paper currencies:

No comments:

Post a Comment