TOKYO—One of the world’s central banks’ best-kept secrets is just how much Chinese officials exchange dollars for gold.
Governor Li Gang’s team People’s Bank of China I don’t really admit it. But given the distinct policy trajectory pursued by Chinese President Xi Jinping in recent years, the PBOC need not.
Xi’s position hasn’t changed much as other governments recognize that confidence in the world’s reserve currency is waning and that alternatives to the dollar are desperately needed.
In particular, with the U.S. national debt surpassing $30 trillion, inflation hitting a 40-year high, the Federal Reserve pushing its largest economy into recession, and a mob of inflammatory Republicans pushing Washington to They are threatening to use the debt limit for political purposes again.
Not surprisingly, central banks that once stored dollars buy gold With the fastest clip on record. In the July-September quarter, the central bank more than quadrupled its gold purchases from the previous year, adding nearly 400 tonnes net to its already sizable reserves.
These numbers for the World Gold Council are no exception. The year-to-date surge in gold buying has already far surpassed his 12-month period since 1967.
Investors doing the math can see that about 90 tonnes worth of purchases are in Turkey (31.2 tonnes), Uzbekistan (26.1 tonnes), India (17.5 tonnes) and other developing countries. The remaining 300 tons are widely believed to have Chinese fingerprints on them.
Xi’s ambitions to increase the use of the yuan in trade and finance would be greatly boosted if the Chinese government made the yuan fully convertible. Ditto for giving independence to PBOC Communist Party interference.
But, as the French Finance Minister Valéry Giscard d’Estaing put it in the 1960s, Washington takes for granted the dollar’s “exorbitant privilege”, meanwhile, U.S. officials don’t want it for Xi. I work for Xi Jinping.
You can connect the dots going back decades, but all four past presidents share responsibility. George W. Bush, who was president from 2001 to 2009, blew Washington’s budget surplus with huge tax cuts for the wealthy. He then launched a costly and unreliable war on terrorism.
In turn, Barack Obama (2009-2017) failed to treat the underlying causes of the Lehman Brothers crisis and instead tended to symptoms. It was under his watch that Republicans tinkered with the government’s debt ceiling. In 2011, S&P Global Ratings withdrew his AAA credit rating in Washington.
Donald Trump’s inauguration in 2017 brought another budget-squeezing tax cut that overwhelmed Bush’s tax cuts. Meanwhile, Trump’s trade war with China has undermined confidence in US leadership. His threats to the Fed chairman Jerome Powell The rate cuts were followed by one of the world’s most incompetent Covid-19 responses, resulting in an unthinkable death toll of over a million.
With Joe Biden taking office in 2021, there has been a new explosion in government spending. It has added to an already chronic public debt challenge and pumped money into an economy already in a frenzy amid supply chain disruptions. It’s not moving fast enough to take away from the Preparatory Council.
Fast forward 671 days and dollar selling accelerates. To some extent, this reflects investors believing the days of the Fed raising rates at 75 basis point intervals are over. But we cannot ignore the warning signs that central banks are vying to buy gold.
Nikos Kavalis, managing director of precious metals consultancy Metals Focus, says the yellow metal is shining now thanks to its nature of not being “the responsibility of other countries.” In the near future, “we believe central banks as a whole will continue to be net buyers.”
Part of this rationale reflects the difficult public debt calculations that are now starting in global markets. Emre Tiftik, economist at the Institute of International Finance, said: Debt to GDP ratio — nearly 343% — now 20 percentage points lower than its peak in Q1 2021, “helped by strong growth and happy inflation.”
However, he said, “emerging market debt-to-GDP ratios continue to rise, especially in the financial sector.”
Tiftik explains that inflation-adjusted global bond issuance is currently at its lowest level in years. However, “we should see more sovereign issuance in 2023 as governments seek to support growth and meet higher demand for funds.” with US dollar debt”
In short, Tiftik says that “global sovereign interest rate bills are set to increase rapidly”, especially in sub-Saharan Africa, but also in emerging economies in Europe and Asia. This partly explains why the demand for gold is soaring.
Who knows if central bank gold purchases will continue. EY-Parthenon economist Gregory Daco noted that Powell Fed appeared to have recalibrated monetary policy at his November FOMC meeting by adopting a new ‘speed versus destination’ paradigm. I’m here. pace. “
Daco adds: Possibility of over-tightening”
Christopher Waller, a member of the US Federal Reserve, said last week, “It’s not softening. Stop paying attention to the pace and start paying attention to where the endpoint is. “Until things settle down, the end point is still far away.”
Meanwhile, Beijing was waiving its US debt. Between the end of February and her end of September, China sold at least her $121 billion in US Treasuries. The sale intensified around the time Vladimir Putin’s Russia invaded Ukraine.
Since July, China’s gold imports from Russia have surged. In that month alone, China’s gold trade surged nearly 50 times from the previous year.
Indeed, Beijing has intermittently cut its dollar holdings since 2018, when Trump launched the trade war. China’s debt stockpile in mid-year was the lowest since 2010.
It was then-Chinese premier Wen Jiabao who said Beijing was “concerned about the security of our assets” and told Washington, “We will respect that word, remain a trustworthy country, and ensure the security of China’s assets.” It was a year after I urged him to do so.
Two years later, in 2011, S&P confirmed Wen’s darkest concerns when it downgraded the US government’s debt. This was in response to Republican lawmakers’ refusal to increase Washington’s legal borrowing limit, risking default.
Now, as Republicans prepare to stay in power in the House, debt ceiling hostage again. This all-burn-out tactic will make it harder for the Biden administration to pay the bill. The resulting impact of defaults could dwarf the 2008 global crisis.
Fiscal waste, meanwhile, will give Biden Treasury Secretary Janet Yellen little freedom if another coronavirus variant emerges and blames the economy. The resulting slowdown could spell doom for corporate profits and U.S. stock prices.
This dynamic will play out when the renminbi comes into its own. According to the latest statistics from the Bank for International Settlements, the yuan is the fifth most traded currency in the world. China’s currency has surged from eighth to he’s fifth in just three years.
The PBOC is also miles ahead of the Fed. central bank digital currencyElectronic Yuan was used in limited form at the Beijing Olympics earlier this year. This is a first for any major monetary authority, giving China first-mover advantage in rewriting the future of its currency.
But Washington’s biggest concern right now is that the major monetary authorities see first-mover advantage in dumping the dollar. Asian saving is how the US has pulled off the magic trick of keeping yields from skyrocketing while being heavily indebted. Along with Japan and China sits the top 10 holders from Asia. about $3.5 trillion Just as inflation surged to its highest level in decades and political polarization deepened.
Fed policy turmoil is also important. “Investors have mixed feelings about his gold in 2022,” said UBS analysts. It’s a crossover with elevated macro uncertainty (bullish gold).” They expect the Fed to start cutting interest rates from 5.0% to 3.25% in 2023, pushing gold from around $1,740 today to 1,900 oz.
China’s supposed gold reserves have come at the expense of the dollar, suggesting that the momentum of using the yuan as a reserve currency is accelerating. Of course, we need to be careful about the slump in the Chinese economy this year. Xi’s growth-hindering “no-coronavirus” lockdown has pushed GDP growth to its slowest pace in three decades. This is further pressure on the turbulent real estate market.
As even China bull Ray Dalio, founder of hedge fund Bridgewater Associates, has pointed out, the question is whether President Xi Jinping is easing the draconian coronavirus lockdown or doubling down. There is a great deal of “confusion” about what is going on.
Fitch Ratings economist Tiran Kam said: However, policies aimed at supporting housing demand will continue to be prudent and selective as governments avoid policies that could lead to house price reflation.
“The direction of the ‘coronavirus zero’ policy and the timely delivery of existing homes are also important factors in homebuyers’ sentiment. implementation important for liquidity”
But the long-term trajectory of global currency markets is still dollar-negative as China and other Treasury-holding nations switch to assets that John Maynard Keynes once dismissed as “barbaric relics.” That relic is now flashing a red light for the dollar bulls.
Follow William Pesek on Twitter at @WilliamPesek.