According to a new Wikileaks release, China has taken a portion of their gigantic foreign holdings and shifted it away from the US dollar into gold. The move is expected to raise the ire of America.
“They [the US and Europe] intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the US dollar or Euro,” stated the 2009 cable, quoting Chinese Radio International. “China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold.”
This move is being combined with China’s plan to make its currency fully convertible for trading on international markets by 2015. Right now there is s great amount of difficulty in making the conversion because of thigh government policy. China currently doesn’t own much gold for its economies’ size, it has about 1,054 tonnes (according to the World Gold Council), making it the sixth-largest holder of gold in the world.
By buying the gold and making the yuan convertible internationally, China will weaken the US dollar as the world’s reserve currency, undermining the dominant global position the US holds in finance now. This weakening of the US dollar’s global power would make it much more difficult for the US to borrow money and to run perpetual trade and budget deficits.
This is how it was explained by Al-Jazeera:
“As a reserve currency, the US dollar is the default for international transactions. If, for example, a South Korean company wants to buy wine from Chile, chances are they will carry out the transaction in dollars. Both companies must then purchase dollars to conduct their business, leading to greater demand. The value of global commodities, such as oil, is also generally demarcated in US dollars.
Being a reserve currency allows the US to borrow at low interest rates, as central banks around the world are eager to buy US government debt. Any country that can finance its expenditures by printing money or selling bonds is essentially getting a free lunch.”
If China takes even a portion of America’s position as world reserve currency, it would have tremendous effects on the US debt held by foreign countries. The American debt rating would begin to decline as the dollar has less strength. It would also mean that it will become harder for the US to pay back debt it already owes. There is a real danger that this could sink the US dollar completely.
The move by China, which does threaten US interests, should not be unexpected. After all they do hold $3.04tn US dollars in reserves according to Xinhua news agency, and $1.166tn of US government debt as of June 30, 2011, according to the San Francisco Chronicle. This is a very dangerous amount to hold. A default of the US dollar could potentially destroy the Chinese economy. China’s reaction is excellent, diversify the debt being held, and increase the power of your own currency at the same time.
Buying gold is smart thing to do with American debt. As America reaches closer and close to outright bankruptcy, the value of gold keeps increasing. The gold is worth more than American money.
I think what we see here with China is a continuing trend towards toppling America as the world’s controller of finances using its currency as a mechanism. Much of the violence in the Middle East and Africa stems from challenges to US power. Before the invasion of Iraq, Saddam Hussein began a policy of accepting Euro currency for the sale of oil. The US began to panic thinking that this trend would continue, they had to stop the Organization of Petroleum Exporting Countries (OPEC) from following Ba’athist Iraq’s lead to overcome the oppressive dominance of the U.S. dollar currency.
The new war on Libya is not really any different. Moammar Gaddafi began a policy of encouraging the purchase of their oil with gold thereby bypassing the US dollar making it more profitable. The African Union on the advice of Gaddafi began looking into their own currency for trade, one that would be based on a Gold Libyan Dinar currency. This is what caused the US to invade Libya using so-called rebels. The Europeans however did not want to be left out of any future profits to be made, thus they joined in.
The Third World, particularly the Middle East and Africa are beginning to challenge the authority and domination of US imperialism. These people’s know that the only path to liberation is to throw off the shackles of first world exploitation by the US. China no doubt sees this trend and is making their own play for world reserve currency.