China to Be Long On Gold & Real Estate and Short on the Dollar

Zhou Xin and Alan Wheatley report in the Guardian, "Li Lianzhong, who heads the economic department of the Party's policy research office, said China should use more of its $1.95 trillion in foreign exchange reserves to buy energy and natural resource assets.

"Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S. Treasury securities.

"'Should we buy gold or U.S. Treasuries?' Li asked. 'The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.'"

China has 1,054 metric tonnes which, with gold selling at $941/oz, is worth $35 billion compared to America's 8,133.5 metric tonnes worth $270 billion.

Dow Jones reported that gold was up during the day's trading: "The initial rise occurred on a day when the U.S. dollar weakened partly in response to comments from the People's Bank of China saying it will push for reform of the international currency system to make it more diversified and reduce over-reliance on the current reserve currencies, primarily the dollar. This particularly caught the eye of gold traders a day after a senior economic researcher in the Communist Party expressed concern about the dollar and said gold could be a better alternative.

"'The People's Bank of China's call for a new global reserve currency or super-sovereign currency will likely lead to further pressure on the dollar and gold buying,' said Mark O'Byrne, director of bullion dealer GoldCore. "


The BRIC countries have called for the creation of a new reserve currency or at least a reduced dependence on the dollar.

According to Zhou Xin and Alan Wheatley, "China disclosed on April 24 that it had increased its holdings of gold to 1,054 tonnes from 600 tonnes since 2003.

"However, China's foreign exchange reserves have grown so fast over the same period that gold's share of the stockpile, the largest in the world, has shrunk.

"Li cited the high share of gold in the foreign exchange reserves of the United States, Italy, Germany and France, to argue that China's gold holdings, which account for about 1.6 percent of its reserves, are too small.

REFORMING THE SDR

"China does not disclose the composition of its currency reserves, but bankers assume around 70 percent of it is held in dollar assets.

"China is the largest single holder of U.S. Treasuries, with $763.5 billion at the end of April, according to U.S. Treasury data. [ID:nTRU000389].

"Analysts say this data set understates the true number as it does not capture paper bought through dealers in London or elsewhere.

"Li said a second reason for buying more gold would be in anticipation of the yuan one day becoming a reserve currency.

"The yuan is not convertible on the capital account, meaning it cannot be freely traded for other currencies for financial transactions that are not related to trade.

"This rules out the yuan's use as an international reserve currency, for central banks would not be able to convert it quickly if necessary.

"But, in a very preliminary step towards that goal, China is paving the way for greater use of the yuan beyond its borders.

"
The People's Bank of China has arranged currency swap deals with six countries since December totaling 650 billion yuan ($95 billion) so that trade and investment with China can be conducted in yuan, not dollars.

"And China will soon allow selected firms in the southern province of Guangdong that trade with Hong Kong to settle their transactions in yuan, or renminbi.

"'If the yuan should go international or become a reserve currency, China needs more gold to back that,' Li said.

"When the yuan does become an international currency, which Li acknowledged was a long way off, he said the composition of the SDR should be reformed to include the Chinese currency.

Ideally, in the long term, the SDR would be made up of the dollar, euro, sterling and yen and yuan, each with a weighting of 20 percent, Li said.

"The SDR is currently made up of the dollar (with a weighting of 44 percent), the euro (34 percent), the yen (11 percent) and sterling (11 percent)

"The four currencies in the SDR, which must be convertible, are those issued by Fund members with the largest share of global trade. The weights assigned by the IMF are based on the value of exports and the amount of reserves denominated in those currencies.

"The composition of the basket is reviewed every five years. the next review is due in 2010."