Editor's note: Paragraph 15 misquoted Jeffrey Christian regarding why the PBOC has not reported an increase in its gold reserves since 2009; the article has been revised to reflect his opinions.
(Kitco News) - Two financial heavy weights agree that rumors of China creating a new gold standard for its currency are unfounded and unrealistic.
In the last few weeks several blogs and news articles have highlighted rumors that the Chinese government and The People’s Bank of China have been quietly buying gold with plans of creating a new Bretton Woods gold standard; however, both Jeffrey Christian, managing director at New York-based research firm CPM Group and Jim Rickards, author of the bestselling book, “Currency Wars: The Making of the Next Global Crisis,” said the last thing China wants is its currency to be tied to a gold standard.
Jim Rickards, author of the bestselling book, "Currency Wars: The Making of the Next Global Crisis,"
In an interview with Kitco News, Christian explained that it took decades for China to distance itself from the gold market and he doubts its government and central bank would readily return to it. Rather he feels that China’s intention is to be part of a new global currency reserve.
Rickards echoed this. China is not buying gold to create a new gold standard; rather it is aiming to make the Yuan more attractive, with the end result of being included in a basket of currencies, referred to as the Special Drawing Rate (SDR). He added that there is a move to make the SDR the new global reserve currency.
“Everybody knows that the U.S. dollar’s days are numbered but there is no really currency to take its place except for the SDR,” he said. “What the world is trying to do is move to the SDR and China is fine with that.”
Rickards added that China’s goal of being in an SDR basket is the best of both worlds; the country can still have total control over its monetary policy and capital accounts but still influence global economics by being part of a basket of currencies.
“What the Chinese want is to have the Yuan in the SDR basket but not open up their capital account,” he said. “That is a backdoor way for the Yuan to be a de facto reserve currency without having to give up control.”
The SDR, also known as “paper gold”, may have added to the gold standard confusion, said Christian.
Jeffrey Christian, managing director at
Christian added that he has some doubts as to whether a global reserve currency could work given that attempts in the past have failed. He said a global basket of currencies could lead to violent and unpredictable volatility.
“[Paper gold] would not work because you have these period radical adjustments instead of daily adjustments,” he said.
Because of expected weakness in the U.S. dollar, Rickards is a more optimistic of a global currency basket; however, before China can get there, the country has to diversify its assets, which means buying gold, he said.
The two analysts also agree that expectations the Yuan will become a reserve currency on its own are extremely overblown.
Rickards said that China doesn’t have the monetary infrastructure to be a reserve currency
“[The Chinese] are a long way from being a reserve currency. In fact they many never be a reserve currency because I’m not sure they want to be a reserve currency,” he said.
While both Rickards and Christian agree that China is buying gold, the two differ on how the yellow metal is being used. According to IMF records, China’s central bank has 1,054 metric tons of gold but it has not updated its gold reserves since 2009.
Rickards said he thinks China has not updated its reserves because they continue to buy gold. He said China has a pattern announcing their reserves every six years, after the bank has reached its target.
“Prior to 2009 the last time they announced [their reserves] was in 2003, so this is nothing new,” he said. “If you extrapolate that tempo, what you would expect is their next announcement maybe late 2014 early 2015. I don’t know the number, but my first approximation would be between 4,000 5,000 [metric tons].”
Rickards said China wants to diversify its holding so it currency is more attractive and will be accepted in the SDR.
On the contrary, Christian said he doesn't think the central bank has bought gold since 2009, which is the reason why its reported gold reserves have not risen since then. He added that he suspects the gold that is being bought is for the Chinese sovereign wealth fund, China Investment Corporation, which is buying the yellow metal to diversify and protect its investments.
“It’s much more nuanced then the gold market would tell you,” he said.
Christian added that the sovereign wealth fund was created to help build infrastructure within the country, which will eventually be a better way to stabilize the Yuan and make it more attractive in the global marketplace.
By Neils Christensen of Kitco News firstname.lastname@example.org