China is no longer content with gold, but is building the infrastructure for a new monetary order. After 22 consecutive months of acquisition of the yellow metal, Beijing would consolidate the bridges between gold and the yuan, while its exposure to American Treasury bonds is declining. We therefore observe the beginnings of a standard “Yuan-gold” likely to reduce dependence on the dollar.
In brief
- China strengthens its gold reserves after 22 consecutive months of accumulation.
- Beijing is developing infrastructure linked to gold and the yuan, particularly between Hong Kong and Shanghai.
- The internationalization of the yuan and BRICS Pay are fueling the debate on an alternative to the dollar-dominated system.
- China is reducing its exposure to US Treasury bonds, amid diversification of its reserves.
- The hypothesis of a gold yuan standard remains contested, while the dollar retains a dominant place in global reserves.
China strengthens the role of gold in its monetary strategy
China has just accumulated gold for 22 consecutive months. For July, the People’s Bank of China (PBoC) announced the addition of 20 tonnes of gold to its official reserves. Such regular accumulation brings total assets to nearly 2,366 tonnes, or 8% of Chinese official reserves. This statistic places Beijing as the sixth largest gold holder in the world, behind the United States, Germany, Italy, France and Russia.
Hong Kong reportedly established a government-backed gold clearing system linked to Shanghai. This is the first component of an international network of vaults intended to allow settlements in yuan against gold.
This development is linked to the next Chinese presidency of the BRICS and Xi Jinping’s announcement of a third “golden decade”. Such a reading takes into account only one formula :
They built the vaults, bought the gold and named the decade after it.
Beijing therefore announced the internationalization of the yuan for global trade and settlements. The BRICS Pay payment infrastructure, associated in its narrative with China, Russia and India, constitutes an alternative to SWIFT and the dollar-dominated system, with a gold backing. These various elements fuel the thesis of the adoption of a new gold standard by China.
This thesis is thus based on several interrelated developments:
- China’s gold accumulation for 22 consecutive months;
- A gold clearing system in Hong Kong connected to Shanghai;
- A proposed international network of vaults allowing settlements in yuan against physical metal;
- Increased internationalization of the yuan in trade and settlements;
- BRICS Pay, presented as an alternative to the dollar-dominated system.
The decline in American assets fuels the debate on the dollar
China sold $70 billion in US Treasuries. This is the largest sell-off since the 2008 financial crisis. Currently, gold has overtaken US Treasuries as the world’s reserve asset. So this is not an isolated movement. It would participate in a transformation likely to have, in the long term, repercussions on American bond yields.
The reading of Chinese assets in the United States is, however, debated. Thus, American statistics attribute securities to the country in which their depository is located. Indeed, 618 billion dollars of Treasuries officially held by China, nearly 450 to 500 billion dollars attributed to Belgium and the Netherlands and some 460 billion dollars to the Cayman Islands, according to official information.
The hypothesis of a yuan linked to gold remains hotly contested
The claim that China would officially move to a new gold standard would be inaccurate for many observers. The latter therefore contest such a conclusion. They question the idea that BRICS Pay would be backed by gold and recall that the internationalization of the yuan constitutes an ancient Chinese ambition. Currently, the yuan represents 2% of world reservescompared to almost 60% for the dollar.
Beijing would not necessarily have an interest in bringing about total dedollarization. A collapse of the greenback would reduce the value of US assets held by China, while a sharp appreciation of the yuan would weigh on Chinese exports.
The strategy could therefore be more about reducing exposure to the American financial system than about a complete break with it. Between diversification of reserves, search for financial autonomy and a true gold yuan standard, a decisive step still remains to be taken.
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