I've been predicting this was a possibility for years now

[Libertarian666]

Does that mean I'll get the "Nobel economics prize"?

http://rbth.asia/business/2013/07/17/ch ... 47997.html

[dualstow]

Does that mean I'll get the "Nobel economics prize"?

Nope. Not even if you keep it in quotes.

[Pointedstick]

Experts warn however that, apart from benefiting no-one, such a decision may actually have catastrophic consequences.
Related

Separating the yuan exchange rate from the US dollar may further weaken the American currency in the long run; in addition, China's monetary policy would become very much restricted, believes Evgeny Nadorshin, chief economist at AFK Sistema.

I agree. It might be a fun way to hurt the USA, but long-term, I really don't see what China's government would actually gain from such a maneuver.

[Mdraf]

The only benefit I see if China does this is to attract foreign investment capital which is sitting around underutilized and slowly being eroded by hidden inflation. But why does China need capital? Their factories are starving for more business. They don't need capital. Mystery. Maybe just a rumor.

[AdamA]

Does that mean I'll get the "Nobel economics prize"?

http://rbth.asia/business/2013/07/17/ch ... 47997.html

Hopefully they don't use fake gold.

http://www.businessinsider.com/chinese- ... cts-2013-7

[Gumby]

China likes to talk the talk, but it rarely ever walks the walk.

It would be pretty dumb for China to follow through with that idea. All it would do is strengthen their currency and destroy their export market in the process (i.e. their entire economy). Additionally, in order for foreigners to trust their savings in Yuan, the Chinese banks would need to become far more transparent — and that is something China has a history of being very much against.

Furthermore, why would China want to attract investors all over the world to use enormous quantities of their currency (in order to be a global reserve currency) and then give the option to those foreigners to empty their national gold vaults at will? It's such a dumb idea, I can't even think of a reason why they'd go through with it! (Though, I'd love to hear good reasons if anyone can think of any).

[murphy_p_t]

if they want their own population to hold gov't paper...rather than buying the metal itself...to give the population confidence in their own currency.

Regards foreigners draining the metal if on a gold standard...those are separate issues (convertibility vs peg)

[Libertarian666]

The only benefit I see if China does this is to attract foreign investment capital which is sitting around underutilized and slowly being eroded by hidden inflation. But why does China need capital? Their factories are starving for more business. They don't need capital. Mystery. Maybe just a rumor.

I've explained (on another thread) the reason that they would do this: to replace the USA as the world's biggest economic power by removing the ability of the US to buy whatever they want with freshly printed "dollars".

But what do I know? I'm just an (amateur) Austrian economist.

[Mdraf]

I'm very skeptical about the veracity of this rumor. That web site is a Russian one and they cite "various media sources" without naming a single one.

[Gumby]

if they want their own population to hold gov't paper...rather than buying the metal itself...to give the population confidence in their own currency.

Is there a lack of demand for Yuan in China? I wouldn't think so. And the government has been encouraging citizens to buy physical gold.

by removing the ability of the US to buy whatever they want with freshly printed "dollars".

Not gonna happen. It would be a great idea if they want us to buy less crap from them, but their entire economy depends on us buying their crap. They'd be cutting off their own nose to spite their face.

[Ad Orientem]

Not going to happen. First China would be committing economic sepuku with the resultant spike in their national currency which they have been working for years to artificially suppress. It would almost certainly precipitate a global financial panic and because of the suddenly strong currency it would plunge China into a spectacular depression. No nation can unilaterally go back ot a gold or silver standard for exactly those reasons. Consider what happened to the US and France when we stubbornly clung to the gold standard in the early 30's while the rest of the world dumped it.

And just as an add on there are international conventions to which China is a signatory that prohibit the use of gold for currency.

[dualstow]

I agree with Ad's post above. Beside it being a bad idea, there is far too much anti-Japanese sentiment in China for them to commit seppuku, even metaphorically. 

[Bean]

China would do it for reserve currency status.  Pegging to gold instead of the QE infinity dollar.  Makes perfect sense.

Those saying it is a terrible idea for China to back its currency with gold, then why is it a good idea to back the PP with 25% gold?

[Libertarian666]

I guess I shouldn't be surprised at the lack of understanding of the gold standard evidenced here. Almost no one understands it, so why should the members of this board?

Except Bean. 

[Pointedstick]

China would do it for reserve currency status.  Pegging to gold instead of the QE infinity dollar.  Makes perfect sense.

How would this play out?

Step 1: China: "Ha, the Yuan is now pegged to gold! Cower before our monetary dominance, you fools!"
Step 2: ? ? ?
Step 3: The rest of the world rushes off to their broker to buy Chinese bonds.

Can you explain what happens in step 2?

[Bean]

Step 2: ? ? ?

Can you explain what happens in step 2?

Yes, they stop buying fiat sovereign debt, if they want to.  Trade imbalances would now have a tangible peg that has greater resistance to political manipulation.

To translate this effect down to an individual's perspective, why do collateralized loans have lower rates? Because there is financial pain to missing your obligation.  Gold does this very well at a global level.  There is about 5000+ years of evidence on how effective this is.

So I ask again; if China doing this is silly, why are we holding gold?  It is completely worthless unless you believe in a possible gold standard and its benefits.

[Pointedstick]

Step 2: ? ? ?

Can you explain what happens in step 2?

Yes, they stop buying fiat sovereign debt, if they want to.  Trade imbalances would now have a tangible peg that has greater resistance to political manipulation.

But China wants to manipulate their trade imbalance politically.

So I ask again; if China doing this is silly, why are we holding gold?  It is completely worthless unless you believe in a possible gold standard and its benefits.

I'm not a country, I'm an individual investor. We hold gold because:

1. It is resistant to government manipulation and tampering
2. It is more difficult for governments to freeze or confiscate than electronic assets
3. It hedges against inflation and negative real interest rates
4. It is a tangible, portable, concealable wealth storage unit
5. It's shiiiiiiiny 

Not coincidentally, these are all the exact reasons why government hate gold (except maybe for #5). It's like government kryptonite. That's why I have a hard time wrapping my mind around why any government would actually want to bind their own hands by giving up control over their currency.

The governments of the world are sick of being bound by gold; that's why we hold it.

Any advantage the Chinese might gain in terms of international trustworthiness would be counterbalanced by the fact that it would be very difficult to abuse or even take advantage of their newfound power; with the world clamoring for yuan, they would have to either continuously mine ridiculous amounts of gold to back the new yuan-denominated bonds that people bought, or allow the yuan to continuously strengthen and wipe out their export economy.

[Gumby]

Step 2: ? ? ?

Can you explain what happens in step 2?

Yes, they stop buying fiat sovereign debt, if they want to.

Translation: They stop making us iPhones and iPads, if they want to.

To stop taking our money is to stop working for us. The whole point of a cheap Yuan is to make it easy to employ billions of people in large factories. It does them no good to have a strong currency in a fiat world because their crappy products would become unaffordable and would ruin their entire cheap labor economy.

So I ask again; if China doing this is silly, why are we holding gold?  It is completely worthless unless you believe in a possible gold standard and its benefits.

We hold gold because we are not a country. We are currency users. We, as individuals, cannot issue our own currency, like China (or other fiat nations) can whenever it needs anything. It makes no sense for an exporting nation to strengthen its own currency.

Exporting countries do everything in their power to keep their currencies weak so that people will buy their exports.

My guess is that this entire story was a rumor created by someone who wanted to see a short term uptick in gold by gullible gold buyers. It just doesn't make any sense if China wants to preserve its own economy and keep its docile populace fully employed. 

[dualstow]

Translation: They stop making us iPhones and iPads, if they want to.

I guess Apple is moving manufacturing back to the U.S. just in time.

[Libertarian666]

Here's someone else who understands the value of a strong currency:

"Never in the course of history has a country's economy failed because its currency was too strong. It's a pathology that simply does not exist. On the other hand, the list of those ruined by weak currencies is extensive. The view that a weak currency is desirable is so absurd that it could only have been devised to serve the political agenda of those engineering the descent. And while I don't blame policy makers from spinning self-serving fairy tales (that is their nature), I find extreme fault with those hypnotized members of the media and the financial establishment who have checked their reason at the door."

http://advisorperspectives.com/commenta ... 052413.php

[Libertarian666]

Interesting article. What do folks here speculate might happen to foreign investments in Chinese assets if this should happen: such as Chinese equity and bonds?

I don't know about equity, but gold-standard bonds issued by a solvent issuer should be phenomenally valuable.

[MediumTex]

Here's someone else who understands the value of a strong currency:

"Never in the course of history has a country's economy failed because its currency was too strong. It's a pathology that simply does not exist."

I'll bet some exporters in Japan and Switzerland in recent years would disagree.

It's true, however, that for a nation whose economy doesn't depend heavily on exports, a strong currency is usually a good thing.  In a globalized world, however, there are very few countries that don't care about the competitiveness of their exporters in global trade.

Much of the meteoric rise of China as a global economic power has by most accounts been driven by an artificially depressed currency value.  I would say that this was one clear recent example of a weak currency conferring significant economic advantages on its issuer.

[Libertarian666]

Here's someone else who understands the value of a strong currency:

"Never in the course of history has a country's economy failed because its currency was too strong. It's a pathology that simply does not exist."

I'll bet some exporters in Japan and Switzerland in recent years would disagree.

It's true, however, that for a nation whose economy doesn't depend heavily on exports, a strong currency is usually a good thing.  In a globalized world, however, there are very few countries that don't care about the competitiveness of their exporters in global trade.

Much of the meteoric rise of China as a global economic power has by most accounts been driven by an artificially depressed currency value.  I would say that this was one clear recent example of a weak currency conferring significant economic advantages on its issuer.

Yes, many people are convinced that having a weak currency confers economic advantages.

However, even more people are convinced that gold is a "barbarous relic" that has no place in an investment portfolio.

In other words, popularity does not guarantee truth.

[Mdraf]

As in most things the answer is neither extreme. A robust currency which is not grossly overvalued would provide a decent standard of living to its citizens while not stifling exports.  When times are good globally it is not much of an issue. But when things get tight all central banks start manipulating for an advantage.

[AgAuMoney]

By the way, the money of mainland China is the Renminbi (RMB).  Yuan is a sub-unit.  Think of it as Dollars and Cents.

You'll learn a lot more about RMB and China's central bank if you google the proper name.