Wednesday, September 14, 2011
China buying gold to diversify foreign holdings
U.S. still has the largest gold reserve in the world, it will takes years for China to reach U.S. level.
According to a recently released WikiLeaks cable, China is shifting some of its massive foreign holdings into gold and away from the U.S. dollar, undermining the dollar's role as the world's reserve currency.
"They [the U.S. and Europe] intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the US dollar or Euro," the 2009 cable states, quoting Chinese Radio International. "China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold."
Entitled "China increases its gold reserves in order to kill two birds with one stone," the cable is taken together with recent policy announcements from Chinese banking officials. The news may indicate moves by China to eventually replace the US dollar as the world's reserve currency.
European business officials have announced that China plans to make its currency, the yuan, fully convertible for trading on international markets by 2015. Zhou Xiaochuan, governor of China's central bank, said the offshore market for the yuan is "developing faster than we had imagined." The yuan currently can't be easily converted into other currencies, because of government restrictions.
China's gold holdings are small compared to other major economies. It has 1,054 tons, the sixth-largest reserves in the world, according to data from the World Gold Council.
Buying gold and allowing the yuan to be traded freely would definitely weaken the U.S. dollar's dominance as the international reserve currency. The move would force the U.S. government to borrow money and to run perpetual trade and budget deficits.
"The U.S. is used to having the position of having the key reserve currency, but others are eager to replace it," Josh Aizenman, a professor of economics at the University of California and president of the International Economics and Finance Society says.
As a reserve currency, the U.S. dollar is the default for international transactions. Being a reserve currency allows the US to borrow at low interest rates, as central banks around the world are eager to buy US government debt.
"Any country that can finance its expenditures by printing money or selling bonds is essentially getting a free lunch," Aizenman told Al Jazeera.