Saturday, September 3, 2016

Koos Jansen on China, Gold, and the SDR

Readers here know that we are following what happens with the SDR because it could eventually lead to some major monetary system changes we watch for here. We have clearly established that China wants to see the SDR increase its role in the global monetary system and also wants to see the US dollar diminish its role.

Another area we keep an eye on is what role China may think gold should play in any future monetary system changes. This is more difficult to assess because no Chinese government officials or PBOC officials have made any public statements calling for an official return for gold in the monetary system. 

Koos Jansen is highly regarded for tracking the  movement of gold into China and has followed the gold market in China for many years. Recently, he wrote this article which does give us some insight into how China may view gold. The article quotes the Head of the China Gold Association, Song Xin extensively.  This is important information to be aware of because it does provide a glimpse into how China might be looking at a role for gold in the future. Below are a few excerpts from the article.


"The Chairman of the China Gold Association and General Manager and Party Committee Secretary of China National Gold Group Corporation, the latter being China’s largest gold mining enterprise, is Song Xin and happens to be one of my favorite commentators in China. This gentleman made waves in July 2014 when he candidly wrote on Sina Finance that the People’ Bank Of China (PBOC) should slowly raise its official gold reserves to 8,500 tonnes, more than what the US Treasury claims to hold. The article was published in Chinese but translated by BullionStar to share the views by Song Xin with the English speaking world:
For China, gold’s strategic mission lies in the support of renminbi internationalization, and so let China become a world economic power and make sure that the China Dream is realized. … gold forms the very material basis for modern fiat currencies. 
Gold is the world’s only monetary asset that has no counter party risk…
That is why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 tonnes mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 tonnes, more than the US."
. . . . .

"On the surface we can observe China has a vast interest in the SDR, but is the SDR a means or an end for China? What if China is simply using the SDR as a vehicle to achieve other objectives? For example:
  1. Dethroning the dollar. The SDR can be an excellent tool to unwind the dollar hegemony. In addition the Substitution Fund could help an orderly exit from China’s lob-sided dollar reserves.
  2. Internationalize the renminbi. Inclusion of the renminbi into the SDR boosts global renminbi acceptance as a reserve currency.
  3. Reduce capital outflows from China. With respect to M-SDRs, David Marsh of financial think tank the Official Monetary and Financial Institutions Forum (OMFIF) wrote:
Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, which will help dampen capital outflows… 
I think for China the SDR is just a means to an end. The end being to internationalize the renminbi, which of course is connected to the dollars retreat. And as Song Xin clearly states, “gold forms the very material basis for modern fiat currencies” and, “gold reserves should become the cornerstone … for renminbi internationalization”.
Please click here to read the full article by Koos Jansen

Added note -- Koos Jansen offered these comments by email to include with this article for readers here:

"Chinese officials make no mystery of why they hoard gold, its inter alia for renminbi internationalisation (and stability etc). Although, in English media these quotes are harder to find than in Chinese. 

China is quite clear in their push for gold accumulation and development of the gold market, just look at the launch of the Shanghai International Gold Exchangethe Shanghai Gold Fix, and China’s participation in the LBMA Gold Price. But there’s a lot regarding their strategy going forward they do not publicly disclose. 

About Song Xin. Kindly note he’s close to the fire, but he’s not a policy maker. His comments do help us understand what’s going on in China."    -----  Koos Jansen

My added comments: This article is important in my view because it quotes a credible Chinese source on how China views the role of gold as part of its overall plan. It's hard to find public statements by Chinese officials on this topic. There is a lot speculation as to why China has been making such a push to increase its official gold reserves, but here we don't have to speculate since the article provides direct quotes from a respected Chinese source.

Other articles that touch on this that readers may find of interest are this one written earlier this year by David Marsh of the OMFIF and this one by Chris Vermeulen. All of this is why we are interested to see what news comes out at G20 and how China and the US respond to any news about an expanded role for the SDR in the future. These are the kinds of events that directly relate to what we watch for here.

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