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China Embracing Gold in Advance of Post Dollar Era

To challenge the US dollar hegemony and increase its power in the global realm of finance, China has a potent gold strategy. Whilst the State Council is preparing itself for the inevitable decay of the current international monetary system, it has firmly embraced gold in its economy. With a staggering pace, the government has developed the Chinese domestic gold market, stimulated private gold accumulation and increased its official gold reserves in order to ensure financial stability and support the internationalisation of the renminbi.

“The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system…. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run…”

Quote from Governor of the PBOC Zhou Xiaochuan 20091.

In the present zeitgeist, we find ourselves on the verge of a shift in the global monetary order. The shocks through the financial complex in 2008 that reaffirmed the innate fragility of the US dollar as the world reserve currency have sparked China to become a vocal proponent of de-Americanization2, although its end goal is communicated less clearly. Being the second largest economy in the world but relatively in arrears regarding physical gold reserves, China has a strong motive to surreptitiously work on its gold program until completion. For, if it would be candid in its gold ambitions, the price would significantly run higher3, potentially disturbing financial markets and narrowing its window of opportunity to prepare for the next phase.

State Council Rapidly Developed Domestic Gold Market And Stimulated Private Hoarding

China has been infatuated with gold for thousands of years. In the mainland, gold mining and use can be traced back to at least 4,000 years ago, and the metal has always represented economic strength and was regarded as the emperors’ symbol of power4. Although the Communist Party of China captured the monopoly in gold trade and heavily restricted private gold possession since 1949, in lockstep with the gradual liberalisation and the ascend of the Chinese economy the state started to develop the domestic gold market in the late seventies, which accelerated in 2002.

A new page was turned when the Gold Armed Police started operating in 19795, not coincidentally a few years after the US detached its dollar, the world reserve currency, from gold. This army division was initially assigned to gold mining exploration and has done so quite fruitfully. Since 1979, Chinese domestic mining output has grown 2,137 % from an annual 20 tonnes to an estimated 467 tonnes in 2015. In 1982, the first steps were taken in reviving China’s gold retail channels4. For the first time since 1949 people were allowed to buy jewelry and the China Gold Coin Incorporation started issuing Panda coins. The Peoples Bank Of China (PBOC) continued to be the primary gold dealer that fixed the price and controlled all supply flows.

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