CHINA PREPARES FOR THE DOLLAR´S DEATH / MACLEOD FINANCE

China prepares for the dollar’s death

Opening SGE vaults in Hong Kong, Saudi Arabia, and elsewhere where gold is exchangeable for yuan anticipates a yuan gold standard. It will replace the dying dollar for SCO and BRICS.

Alasdair Macleod

During the Mao era, China’s communist universities taught economics students that capitalism would collapse under its own contradictions taking the capitalists’ currencies down with it. 

After Mao, this became modified to embrace state-controlled capitalism, but the fear that the western capitalist system was in decline nevertheless persisted, and China’s own economic history confirmed that fiat currencies never last.

It followed that as China reformed her own economy on capitalist lines, she would have to protect her currency from the inevitable end of the post-1971 fiat currency system by acquiring sufficient gold and silver to protect her own currency for when the time came. 

In 1983, the CCP issued regulations appointing the state-owned Peoples Bank of China to acquire sufficient monetary gold and silver for this purpose.

Fast-forward to today, and we see this prophecy coming true. 

There is little doubt that the 54-year fiat currency system is on its last legs, with the accumulation of government debt in all the major G7 currencies racing towards an existential tipping point. 

That being the case, China is finalising her plans to protect her currency, the yuan, from our currency collapse.

China corners the gold market

For some time now, China has been preparing herself for the inevitable demise of the dollar-based currency system. 

As early as 1983, the Peoples Bank (PBOC) was appointed by the communist administration with sole responsibility for dealing in and managing the nation’s gold and silver. 

Chinese citizens were banned from owning them until the Shanghai Gold Exchange (SGE) controlled by the PBOC was opened in 2002. 

By that time, we can be sure that the government had accumulated a core holding distributed into a number of government accounts, which I estimate to have been at least 20,000 tonnes based on the enormous foreign exchange volumes under the PBOC’s control between 1983—2002.

After the SGE opened, the benefits of gold ownership were promoted to the general public. 

So far, over 27,000 tonnes have been delivered into public hands out of the SGE vaults. 

Additionally, there are unrecorded amounts of SGE vaulted gold held by Chinese banks and institutions, backing public investment schemes and the gold accumulation accounts offered by banks to Chinese savers.

It's not just the government, but China’s citizens also understand the monetary importance of gold, unlike their western counterparts. 

They save in gold accumulation accounts offered by the banks alongside their deposit accounts. 

Linking the yuan to gold will not come as a shock to them and will be a natural development for which they are prepared.

Since 2002, the estimated accumulation of state-owned gold has almost certainly been added to, because apart from relatively minor amounts permitted to leave the mainland for the Hong Kong jewellery trade, no gold leaves China, while substantial bullion imports from predominantly western markets have continued for the 23 years since the SGE opened its doors.

It should also be noted that China has been the largest nation by far in terms of gold mine output for many years, estimated to have mined over 9,000 tonnes since the early 1990s. 

Additionally, Chinese refiners have taken in gold doré from elsewhere adding to eventual refined output. 

And Chinese media has revealed multiple new discoveries in the last year alone amounting to a further 2,000 tonnes.

In effect, China has cornered the physical gold market.

China’s silver policy has been similarly acquisitive. 

As the second largest global silver miner and being the largest global refiner, her unspecified reserves have been bolstered by doré imports over decades. 

However, much of China’s silver imports have been used for industrial purposes, principally photovoltaic cells.

Whatever the actual numbers, it is clear that China and her citizens have accumulated the largest reservoirs of gold and possibly silver in the world. 

The only logical reason for this aggressive accumulation is the certainty that the dollar-based fiat currency system will collapse one day, just as every fiat currency in the past has failed.

G7 government finances are now in crisis

It is not just coincidence that the finances of all G7 countries are together descending into chaos, with their government debts spiralling out of control. 

It is the logical conclusion of 54 years of the post-Bretton Woods fiat currency regime, headed by the US dollar.

The signs that the dollar’s days are now numbered are increasing. 

Unsustainable government debt and runaway budget deficits are the most obvious, to which can be added the erosion of US hegemonic power, and therefore global faith in the value of its currency. 

Opening SGE vaults outside China, whereby gold and only yuan currency short-term instruments can be freely exchanged, is an important step in protecting the yuan from a dollar-based fiat currency collapse.

An interim floating gold-to-yuan standard is emerging, ahead of the day when the rate becomes fixed.

Having cornered the gold market over the last four decades, China is now opening it up to foreigners, principally members of the SCO, BRICS, and other important trading partners such as Saudi Arabia. 

Clearly, this is in preparation for the moment when gold not just protects China’s yuan from an anticipated collapse of the entire fiat currency system but it will replace the dollar for all China’s trading partners. 

Trade with China, and you settle in gold-backed yuan. 

Trade with each other, and it will be the trusted payment.

At the recent SCO summit in Tianjin, we can be sure that confidential briefings and conversations between SCO and BRICS attendees about China’s plans for the internationalisation of the yuan took place in addition to the hegemonic conflict with the US.

The piece that’s missing from this nearly completed Chinese puzzle is the rate at which the yuan will be fixed to gold. 

But with a planned network of SGE vaults outside China beginning to be implemented, soon a fixed exchange rate could be established at a moment’s notice. 

It will be enacted to protect the yuan, rather than as a policy to attack the global currency status quo. 

It is also likely to be based on the principals behind the old Bretton Woods agreement, whereby gold-yuan exchanges will happen at government level, and the facility be available to the Shanghai-based BRICS bank and similar institutions.

How long do we have?

The fact that China’s plans for linking the yuan to gold are now emerging suggests that the Chinese authorities think it’s becoming urgent — perhaps a matter of only a few years. 

Furthermore, the PBOC has been selling off its dollars in favour of gold, confirming this analysis.

In the G7, government deficits are rising, and analysts are not yet factoring in the economic recessions only just beginning to be reflected in some government statistics. 

This is extremely important, because of the consequences for deficits which are bound to rise significantly above current forecasts.

There will be two consequences. 

The first is that the currency debasement resulting from increased deficits will lead to higher inflation in 2026; and the second is that bond yields will rise to reflect anticipated currency debasement, adding to borrowing costs which are spiralling out of control. 

Financial markets are wrongfooted in these respects, so they will come as a shock

Higher inflation plus higher bond yields will threaten to turn a recession into a slump. 

It is a self-feeding phenomenon destroying all credit values. 

It won’t just be borrowing costs spiralling out of control. 

It will also be an acceleration of inflation driven by a loss of faith in all fiat currencies.

At least nations representing over 70% of the world’s population will be in a position to project themselves by replacing collapsing dollars, euros, yen, and sterling with gold-backed yuan. 

Unfortunately, the benefit is not for us.