China has nearly doubled its gold reserves in the last five years as it
diversified its enormous foreign exchange reserves away from US dollar assets,
the head of the country’s secretive foreign exchange administration said in a
rare disclosure on Friday.The country now holds 1,054 tons of gold, up from the 600 tons it last
disclosed in 2003, according to Hu Xiaolian, head of the State Administration of Foreign Exchange (Safe), which manages the country’s $1,954bn in foreign exchange reserves.The spot gold price rose 1 per cent on Friday as investors saw the news as a
sign China will further increase its gold holdings as it continues to diversify
reserves away from the US dollar.
The pessimistic view is that this as an attack on US economic and political power: breaking news: China has been secretly stocking up on gold:
My analysis is this: The Chinese want to weaken the U.S.'s power derived through its currency status. They have been setting the stage to do so for some time. However, they want to act in a way that benefits them in the short- and long-term. Cutting loose in an uncontrolled fashion now benefits no one with the world economy in dire straits. However, when the economy does right itself, you should see some major changes in the currency markets.
Or, we could be getting out of the grip of China's unhealthy focus on holding our currency and acting as our creditor. It would perhaps also reduce the phenomena of oceans of money flowing around the world that was memorably described in Smick's "The World Is Curved."
Perhaps without intending to, the US has become too dependent on China's investments in US currency, equity, and debt as a means of funding our ever-expanding budget deficits. China is welcome to try to diminish US power by reducing the dollar's reserve status. However, doing so would harm China as much as it would hurt us. It is hard to imagine such a thing coming to pass without a major war or economic disruption as its proiximate cause.
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