‘Prepare for the Worst’: China Diversifying Gold, Currency Reserves as US Dollar Becomes Riskier Bet
16:34 GMT 09.08.2023 (Updated: 13:30 GMT 10.08.2023)
© Sputnik / Ilya Naymushin
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Experts told Sputnik that China’s binge on non-dollar currency reserves, including record amounts of gold bullion, is being driven by how unstable the US dollar has become. Countries like Russia, which hold few dollar reserves, present a safer bet for investors and traders alike.
China has continued its steady march toward de-dollarizing its economy, revealing on Monday that July had been the ninth straight month of gold purchases and that its foreign currency reserves were even higher than Western experts had predicted.
The People’s Bank of China, the socialist state’s central bank, said that last month it purchased some 23 tons, or 740,000 troy ounces, of gold bullion. That brings its total stockpile to its highest-ever weight of 2,137 tons. Roughly 188 tons of that has been added amid the shopping spree that began last November.
In addition, the PBOC said China’s foreign currency reserves rose by $11.3 billion in July, racing $3.02 trillion - higher than Western experts reportedly believed.
Chris Devonshire-Ellis, Chairman of Dezan Shira & Associates who has a thirty-year investment and business career in China, Russia and Asia, told Sputnik on Wednesday that China was motivated primarily by economic stability, which the politicization of the US national debt has threatened.
“It is clear that China is diversifying its portfolio and adding in more 'solidity' to its reserves. Gold reserves have always been a reliable hedge in turbulent times,” he said.
“There are a couple of issues with this: they can't reduce their US debt holdings by significant amounts at any one time as this would depress the remaining values and upset the global US dollar trade balance - but they can do this gradually. It appears to be a long-term strategy and could take a couple of decades to convert their US debt into other commodities under normal conditions.”
“That assumes things remain as normal - but these are turbulent times. The US will hit its debt ceiling again next year, they could default. They've already recently had their credit risk rating downgraded by Moody's, which raises the cost of American borrowing,” Devonshire-Ellis pointed out.
He noted that Russia by comparison has very little foreign debt, practically no US dollar reserves, and that the ruble has “settled into a reasonable and sustainable trade valuation that assists its internal productivity and its exports,” the latter of which accumulates foreign currencies other than the dollar or euro.
“So China is taking a 'hope for the best' strategy in hoping the US doesn't default soon because I think they are not ready to absorb such a blow, but at the same time a 'prepare for the worst' strategy in continuing a conversion of US, and to some extent EU, debt and currencies into alternatives - including reserves of many other currencies (including their own RMB yuan in addition to the Indian rupee, Japanese yen, UAE dirham and Russian ruble) as well as currencies from lesser traded money such as the Brazilian rial, Mexican peso, certain African currencies as well as Central Asian monies,” the expert explained.
“Gold acts as a hedge against, and to support these - if required. The Chinese can stabilize these smaller currencies with their gold reserves. So could Russia.”
“The Chinese aren't so concerned about what happens in the US economy, they are not so invested. But they are concerned about economies closer to China and with those that possess important supply chain relations (such as Brazil, Central Asia, Russia, the Middle East and Africa) both now and looking ahead. I think the gold reserves are being acquired to protect those rather than the USD relationship.”
8 August 2023, 12:00 GMT
Paul Goncharoff, a management consultant in Moscow, told Sputnik that international trust in the US dollar has “evaporated,” sending essentially all nations outside the Group of Seven scrambling for better places to secure their assets.
Goncharoff recalled the observation by Russian communist leader Vladimir Lenin prior to the 1917 Revolution: There are decades where nothing happens; and there are weeks where decades happen.”
“We are in the process of going through such turbulent weeks and months. China was one of the largest holders of dollar-denominated US Treasury bonds. In the past 12 months alone, they managed to offload $100 billion worth. A significant amount has been spent buying gold as a means to get out of the potential-but-realistic threat of the weaponized US dollar. Their gold purchases have been in small batches here and there, but over the year they have added up significantly. Note that this has been going on for several years and seems to be accelerating now.”
“The biggest risk China faces is the freezing of their USD assets, which mirrors the risk sentiments among most, if not all, of the non-G7 aligned countries on the planet,” he explained. “China has little choice but to continue dumping USD holdings, and shifting to actual physical gold held inside China or other similar marketable commodities while keeping an eye on when or if the USA will impose primary sanctions as they did with Russia and SWIFT. China certainly has currency holdings in rubles, rupees, riyals, and so on, but they are volatile and still influenced by the vagaries of the US Fed, so to preserve value (note that the USD has lost 97% of its value these past 100 years), gold remains a secure and viable means to preserve value, especially in 'interesting times.’”
“The disadvantage of the yuan when compared to the USD is that, quite simply, it is not the default reserve currency of the world. That being said, the ‘exorbitant privilege’ that the USD as the primary reserve has enjoyed these past 70+ years has been sorely abused and has beaten all known records for debt and deficit spending. If push comes to shove and an inflection point happens when there is a global rush to offload US Treasury paper, all will suffer without exception. It would be a truly existential systemic crisis.”
“Nonetheless, China is in a relatively strong position to support the yuan when one considers that the fabric of the Chinese economic system is just about entirely production-based and not a service economy. This is the foundation for longevity and sustainability, tied together with a Belt and Road, regardless of what may or may not occur with currencies going forward.”
Goncharoff noted that the trend is so wide, it even includes US European allies like Poland, which increased its gold reserves by 14.8 tons this past Spring.
“The de-dollarization trend is unstoppable as trust has evaporated. It is also felt that, by nature, any fiat currency remaining apolitical given the grievous political damage done globally through sanctions, freezes, and similar measures is unlikely. The sad reality remains that this is not going to change in the foreseeable future, hence the centuries-tested fallback to gold.”
