CHINA IS MOVING FAST! / MACLEOD FINANCE

China is moving fast!

China is stepping up plans to replace the dollar with a gold-backed yuan. The Shanghai Gold Exchange is opening vaults abroad, and Shanghai futures access is opening up as well.

Alasdair Macleod

The laws of unintended consequences are alive and well: when President Trump tried to put China out of business with punitive tariffs, China immediately responded by accelerating tariff-free trade negotiations with Japan and South Korea. 

And President Xi then went on a whistlestop tour of the principal ASEAN nations. 

Shortly afterwards, the PBOC embarked on a policy of opening up gold and silver trading outside China with new vaults proposed in Hong Kong and Saudi Arabia.

What is this all leading to? 

And are there consequences for the dollar and the entire Western financial system?

The background

When China’s communist party opened up trade with the West in the early eighties, its embrace of capitalism was only partial. 

Following the death of Mao, there was an intellectual rethink — an acceptance that the economics of communism had failed. 

But politically, there was still the need to retain firm political control over China’s diverse ethnic groups for it to retain its civilisation and place in the world.

China’s leadership had watched the West’s cultural and moral decline, confirming that capitalism contained the seeds of its own destruction. 

While grasping capitalism’s benefits and the flexibility afforded by fiat currencies, China had to protect itself from the inevitable crisis towards which western capitalism headed.

In 1983 the CCP passed regulations appointing the Peoples Bank of China with sole responsibility for managing the nation’s gold and silver accumulation. 

And by 2002 the PBOC had obviously accumulated enough gold to permit citizens, hitherto banned from owning it to start buying gold and opened the Shanghai Gold Exchange. 

At the same time, gold mining and the importation of doré for refining and retention became government policy. 

Circumstantial evidence suggests that by 2002, the state had secretly accumulated about 20,000 tonnes of gold, a process which has since continued. 

And from 2002 to date, private sector withdrawals of gold from the SGE’s vaults total about 27,000 tonnes. 

Furthermore, there are additional holdings within the SGE’s vaults, backing commercial bank commitments and ETF holdings.

With all these accumulations, there are strict controls on gold exports, which for practical purposes can be regarded as not permitted. 

Both the state and its citizens are now fully prepared for the yuan to go onto a gold standard.

Similarly, China has accumulated silver stocks. 

Not only is she a major silver producer, but the reliance on doré imports has been greater than gold, with a reliance on price suppression through selling of futures. That is probably coming to an end.

The dollar’s outlook is deteriorating rapidly

The currency events predicted by China’s leaders in the early eighties are now coming true. 

They will have observed not just the cultural and moral decline of America, but the spiralling federal government debt as Obama, Trump, Biden and now Trump again have driven into a debt trap. 

For a future without a bankrupt America and European Union, China has assembled with Russia an alternative global economy in the Shanghai Cooperation Organisation and BRICS. 

The SCO and BRICS secure China’s commodity supplies and export markets independent from a Western financial and economic collapse.

However, China has been careful not to precipitate a currency and economic crisis for the West. 

Instead, she has simply observed a deteriorating situation, only acting to protect her own interests. 

But by her recent actions she is obviously in no doubt that the problems for the dollar are increasing rapidly, undermining its future value. 

Consequently, the PBOC has been reducing or hedging its dollar exposure, most recently by selling dollars for gold.

President Trump’s Liberation Day tariffs may have come as a shock, but China was fully prepared. 

Immediately following Trump’s liberation day on 2 April, China announced that it was fast tracking trade agreements with South Korea and Japan. 

In the week following, President Xi did a whistlestop tour of some of the principal ASEAN trade partnership nations to discuss and secure regional trade agreements. 

And in the week following that, the SGE announced that it planned to open vaults outside China to enable trade and gold to be exchanged for yuan.

So far, vaulting proposals have been announced in Hong Kong and Saudi Arabia. 

Doubtless, there will be more to follow. 

And then last week, the Shanghai Futures Exchange released draft proposals to open up domestic futures contracts to foreign brokers and investors in order to internationalise commodity trading in yuan.

Few if any of these developments have been reported by western media. 

Nevertheless, since 2 April taken together it is a speeding up of policies which suggests that China views a dollar collapse as now being relatively close — perhaps over the next year or two. 

It is becoming clear that the yuan is planned to replace the dollar, and the yuan will be insulated from an unstable fiat currency regime by being linked to gold.

The intention is for the link to gold to be put in place at short notice. 

But that will happen only when China knows that to not do so would threaten the yuan to be taken down with the entire post-Bretton Woods fiat currency system.

The implications for gold

The eventual reintroduction of gold as the only protection against a collapsing dollar-based fiat currency system has been increasingly seen and understood by central banks in the unaligned nations. 

They will be observing, with some alarm surely, the acceleration of China’s plans to internationalise the yuan as a dollar replacement and the mobilisation of gold to protect its value.

Put another way, it is no longer just China and her close partners who have been planning for a world without dollars. 

It is also observed by other state actors and even the major banks and investment houses in capital markets. 

There can be no doubt that global confidence in the fiat dollar is deteriorating more rapidly than is widely thought. 

The rush out of fiat dollars and into real money without counterparty risk, which is gold and potentially silver, is almost certain to increase, driving their dollar-prices significantly higher.

Presumably, the major bullion banks have already protected themselves by going long of gold. 

And following the withdrawal of leased gold from the Bank of England in recent months, central banks are refusing any more leasing, taking much needed liquidity away from paper markets. 

If the implications of all this were understood by traders, you would think that they would be long of futures. 

But they are not, as the chart of Comex open interest indicates:

It is really bizarre. 

There are enormous geopolitical events threatening to destroy the entire fiat currency system, and the hedge fund community seems oblivious to them! 

As stated above, the big bullion banks have probably covered themselves evidenced by their forecasts of significantly higher gold prices. 

The systemic problems are likely to be further down the food-chain. 

And systemic problems with counterparty failures look like being a racing certainty!