China Diversifying Out of U.S. Dollars: Bullish for Gold

According to an account published in the Daily Telegraph by Ambrose Evans-Pritchard, the Chinese government is quite anxious about money printing in the United States and the effect this printing could have on China’s dollar denominated reserve assets.

For months now, the Chinese have signalled growing unease with U.S. monetary policy. And now comes the clearest signal yet that they are moving away from the dollar. Cheng Siwei, a former vice-chairman of the Standing Committee, said point blank that the Chinese central bank was actively diversifying new reserve assets away from the U.S. dollar and into currencies like the Yen and the Euro. He also mentioned gold as an alternative the Chinese are exploring.

The $2 trillion in U.S. dollar reserves the Chinese already have are a sunk cost. Going forward, the Chinese are free to do as they wish with incremental additions to reserves. To the degree that they sell dollars and buy gold, Yen or Euros, there can only be downward pressure on the U.S. dollar.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China’s reserves are more than – $2 trillion, the world’s largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed’s loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."

Notice the statements about an asset bubble in China and the admission that loose U.S. monetary policy is a transmission mechanism. Cheng is right to worry about asset prices in addition to consumer prices as the Chinese economy has a huge amount of overcapacity right now and any inflation is bound to become apparent in asset prices first.

To be sure, there are other voices in Chinese officialdom that are striking a less alarmist tone. One cannot rely on the words of one Chinese official to represent policy makers in China. And Cheng never said the Chinese are now actively diversifying away from the U.S. dollar. Nevertheless, Chinese officials have been talking along this dollar bearish line for months now and I tend to believe their words will lead to action.

That is, at a minimum, bullish for gold and bearish for the U.S. dollar.

Source: China alarmed by US money printing – Telegraph

Comments

[Roger Knights:]

He possibly is preparing public opinion in China to accept the news that it has purchased the IMF's 403 tonnes of gold. And/or he is floating a trial balloon about China buying gold, as have other officials, to see if it provokes any angry responses from Red Guard types. (So far I haven't seen this offered as an explanation--at least in part--for the noises officials have made from time to time about gold, but it makes sense to me.) If not, and apparently it hasn't, then they may go ahead with it.

Sep 07 04:31 AM

[Philly Jim:]

It can only appreciate to say 1050; if the RMB and Rp appreciate much more against USD, then we can expect gold to continue its upward trend, but unless central banks are buying, nobody else will be with gold that high. The feeling on the ground in China is fear for when the money supply tightens and stimulus spending stops, you will have stuck assets and oversupply, with no buyers and inevitable asset deflation, similar to what happened in the states. The dollar has nowhere to go but up in the short-term with near zero interest rates - long-term, I can see the banana republic's currency being worth as much as the Brazilian real.

Sep 07 07:50 AM

[noob:]

I think there is going to be a slow trend upward on Gold for the next nine months as countries and individuals start to back away from USD. There is no information coming forth to indicate that the USD will do anything better fall hard in 2010 with speculation of a collapse/crisis of the currency.
If people think the dollar will remain intact after all this is done, they are going into foreign investments to shore up against the dollar. This is consistent with the lack of industrial investment in this nation as reported elsewhere.
If people think the dollar is going the way of the Confederate Dollar and others, then gold will be about the only option available. That or some other commodity with hard money exchange properties (silver, platinum) that you can get physical possession of.

Sep 07 11:12 AM

[Ricard:]

Here we have a Chinese official calling out an 'asset bubble' and essentially establishing a floor for gold prices. Regarding the latter, it seems he just shot himself in the foot.

Regarding *how* bullish it is for gold, 'buy the rumor, sell the news'. It's quite possible that this bullishness is already priced into gold. Or, we could be in 1998 again, when 'irrational exuberance' was coined - the market had another 2 stellar years left in it before the plunge.

Sep 07 01:42 PM

[milo Wolff:]

China will find it useful to buy and store many industrial metals. Especially in view of their rapid expansion goals. Gold is usually not one of them - at current prices.
See Milo’s bookI and BookII at Amazon.com

Sep 07 02:07 PM

[Ben Gee:]

China is the largest gold producer, it does not have to buy gold to increase its holding. China is buying every resourse company that is available and its storage of resourses is overflowing. China had been doing everything possible in keeping the world economy going for itself as well as others. Is it enough? Probably not. Will China collapse? It better not. The result will be unthinkable.

Sep 07 03:57 PM

[sixpackistan:]

The way I see it, it's not so much that the Chinese are wise- it's that they're not stupid. Wealth can't be created with a printing press- only destroyed.

Sep 07 07:20 PM

[lavrys:]

I say he is smarter than you give him credit for.. if he is talking it then he is not walking it.. They don' t need gold, they need working assets. If they "diversify", it will be by buying up western resources and technology

Sep 08 01:48 AM

[AuGod!:]

I had contributed a rather long, perhaps tedious comment on this topic here, but it has been deleted. I don't know why it was, I was not informed why it was deleted, so this will be my last comment at Seeking Alpha. Good luck to everyone.

Sep 08 07:34 AM