China, Russia Quit Dollar

By Su Qiang and Li Xiaokun
China Daily
Wednesday, November 24, 2010

http://www.chinadaily.com.cn/china/2010-11/24/content_11599087.htm

St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

"That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries," he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.

The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communiqu. Details of the documents have yet to be released.

Putin said one of the pacts between the two countries is about the purchase of two nuclear reactors from Russia by China's Tianwan nuclear power plant, the most advanced nuclear power complex in China.

Putin has called for boosting sales of natural resources - Russia's main export - to China, but price has proven to be a sticking point.

Russian Deputy Prime Minister Igor Sechin, who holds sway over Russia's energy sector, said following a meeting with Chinese representatives that Moscow and Beijing are unlikely to agree on the price of Russian gas supplies to China before the middle of next year.

Russia is looking for China to pay prices similar to those Russian gas giant Gazprom charges its European customers, but Beijing wants a discount. The two sides were about $100 per 1,000 cubic meters apart, according to Chinese officials last week.

Wen's trip follows Russian President Dmitry Medvedev's three-day visit to China in September, during which he and President Hu Jintao launched a cross-border pipeline linking the world's biggest energy producer with the largest energy consumer.

Wen said at the press conference that the partnership between Beijing and Moscow has "reached an unprecedented level" and pledged the two countries will "never become each other's enemy".

Over the past year, "our strategic cooperative partnership endured strenuous tests and reached an unprecedented level," Wen said, adding the two nations are now more confident and determined to defend their mutual interests.

"China will firmly follow the path of peaceful development and support the renaissance of Russia as a great power," he said.

"The modernization of China will not affect other countries' interests, while a solid and strong Sino-Russian relationship is in line with the fundamental interests of both countries."

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a "fair and reasonable new order" in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

He left St. Petersburg for Moscow late on Tuesday and is set to meet with Russian President Dmitry Medvedev on Wednesday.

For further reading:
"Currency settlement benefits Sino-Russia traders", China Daily, November 25, 2010
"China-Russia currency agreement further threatens U.S. dollar", International Business Times, November 24, 2010
"Official promotes yuan in place of reserve currencies", China Daily, November 15, 2010

Suiting Up for a Post-Dollar World

By John Browne
Euro Pacific Capital, Inc.
Friday, June 25, 2010

http://www.europac.net/externalframeset.asp?from=home&id=18958&type=browne

The global financial crisis is playing out like a slow-moving, highly predicable stage play. In the current scene, Western governments are caught between the demands of entitled welfare beneficiaries and the anxiety of bondholders who fear they will be stuck with the bill. As the crisis reaches an apex, prime ministers and presidents are forced into a Sophie's choice between social unrest and bankruptcy. But with the "Club Med" economies set to fall like dominoes, the US Treasury market is not yet acting the role we would have anticipated.

Our argument has always been that the US benefits from its reserve-currency status, allowing it to accumulate unsustainable debts for an unusually long period without the immediate repercussions of inflation or higher borrowing costs. But this false sense of security may be setting us up for a truly monumental crash.

There is fresh evidence that time is running out for the dollar-centric global monetary order. In fact, central banks outside the US are already making swift and discrete preparation for a post-dollar era.

To begin, the People's Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.

In response to the 2008 credit crunch, the Fed printed so many dollars that the People's Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China's workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week's move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar's devaluation. The result will be a shift in wealth from America to China, which may trigger a long-anticipated run on the dollar, while creating investment opportunities in China.

Just days before China's announcement, Russian President Dmitry Medvedev rattled his monetary sabre by telling the press of his intention to lead the world toward a new monetary order based on a broad basket of currencies. Giving strength to his claim, the Central Bank of Russia announced that it would be adding Canadian and Australian dollars to its reserves for the first time. Analysts suggest that the IMF may follow suit. While Russia floats in the limbo between hopeless kleptocracy and emerging economy, it does possess vast natural resources and a toe-hold in both Europe and Asia. In other words, it will be a strategically important partner for China as it tries to cast off dollar hegemony.

Speaking of Europe, the major powers there are moving toward a post-dollar world by rejecting President Obama's calls to jump on America's debt grenade. The prescriptions coming from Washington translate loosely to: our airship is on fire, so why don't you light a candle under yours so that we may crash and burn together. Given that dollar strength is largely seen as a function of euro weakness (as Andrew Schiff discussed in our most recent newsletter, debt troubles in the eurozone's fringe economies have created a distorted confidence in the greenback. However, as you might imagine, Europe has higher priorities than being America's fall guy. Led by an ever-bolder Germany, the European states are wisely choosing not to throw themselves on our funeral pyre, but to wisely clean house in anticipation of China's rise.

In another ominous sign for the dollar, the Financial Times reported Wednesday that after two decades as net sellers of gold, foreign central banks have now become net buyers. What's more, more than half of central bank officials surveyed by UBS didn't think the dollar would be the world's reserve in 2035. Among the predicted replacements were Asian currencies and the euro, but - by far - the favorite was gold. This is supported by Monday's revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made a similar admission. There is no reason to assume these are isolated incidents, or that the covert trade of dollars for gold doesn't continue. To the contrary, this is compelling evidence that foreign governments are outwardly supporting the status quo while quietly preparing for the dollar's almost-inevitable devaluation. What people like Paul Krugman believe to be a return to medieval economics may, in fact, be the wave of the future.

In peacetime, hardened troops will likely tolerate a blowhard general for an extended period; but when the artillery opens up with live ordnance, an ineffectual leader risks rapid demotion. The newspapers are now riddled with hints that foreign governments have lost faith in Washington and the dollar reserve system. It seems to me only natural that after a century of war, inflation, and socialism, the next hundred years would belong to those people who hold the timeless values of hard money and fiscal prudence. Unfortunately, our policymakers are not those people.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Reprinted with permission.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

Medvedev Promotes Ruble as World Reserve Currency

By Paul Abelsky
Bloomberg
Saturday, June 19, 2010

http://www.bloomberg.com/news/2010-06-18/medvedev-talks-up-russia-s-ruble-as-global-reserve-currency-of-the-future.html

Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub.

“Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.”

Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said.

“It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.”

Reasserting Power

Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging.

If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday.

“For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.”

The ruble and the yuan may by 2015 be added to the basket of currencies that set the value of International Monetary Fund units called special drawing rights, Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said. O’Neill coined the BRIC term in 2001 to describe the four nations -- Brazil, Russia, India and China -- that he estimates will collectively equal the U.S. in economic size by 2020.

Free Float

The ruble “has as many reasons to be in it as the pound,” he said today in an interview in St. Petersburg. “If Russia really wants to be in it, it’s got to allow people to use it all over the world.”

Allowing the ruble to trade freely is “very important,” O’Neill said.

“Inflation targeting is key,” he said. Without a shift to an inflation targeting regime, the ruble “isn’t going to be part of the SDR. You can’t have it both ways, really, unless the Chinese change the rules, which they might do by the end of this decade. China is going to be so big.”

Russia may “come very close to floating the ruble” in the course of one year to 18 months, Bank Rossii Chairman Sergei Ignatiev said in April. Even so, the central bank doesn’t need to take on legal obligations to stop intervening in the currency market, he said.

Yuan Flexibility

The People’s Bank of China today said it will allow more yuan exchange rate flexibility and reform of the exchange-rate mechanism as the nation’s economic recovery has “cemented” after the global financial crisis.

Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s.

“We really live at a unique time, and we should use it to build a modern, prosperous and strong Russia, a Russia that will be a co-founder of the new world economic order,” he said.

Read the rest of the article.

For further reading:
"Russia Backs Stronger Rivals to Dollar", The Wall Street Journal, June 19, 2010
"Medvedev sees single currency dream in G8 coin gift", Breitbart, July 10, 2009

China's Online Payment Firms Edgy Over Regulation

By Ma Jingying & Wang Shanshan
Caixin Online
Thursday, May 13, 2010

http://english.caing.com/2010-05-12/100143296.html

BEIJING -- China's third-party payment industry has been around for more than a decade, but nearly half of that period has been shadowed by unfinished plans to regulate the sector.

Most of today's more than 300 players are private enterprises, and collectively, they deal with tens of millions businesses and individuals every year. Last year, more than 580 billion yuan ($84.9 billion) in transfers were recorded. These companies also provide payment mediation and settlement services.

Despite the sector's size and growth, however, the government has delayed finalizing formal regulations. Until now, the central bank has done little more than request public comments on draft payment and settlement regulations, as well as electronic payment guidelines, released way back in 2005.

The page may turn soon, but that hasn't settled concern that smaller companies may lose out to industry giants. A source close to central bank authorities told Caixin that final regulations may be released before July. Caixin also learned a central bank payment system linking many of the nation's big commercial banks -- but perhaps not third-party payment firms -- will come online in August.

Meanwhile, payment companies across the country are waiting to see how the changes may affect their bottom lines.

Major participants such as Alipay hope the measures formally validate their profitable businesses. But smaller competitors worry about being locked out by high entry barriers, and finding their huge investments going to waste.

Successful business model

Third-party payment companies have grown quickly to satisfy the cash-flow needs of the e-commerce industry. They generally function as money gateways and "transfer stations" between merchants and banks.

The model's earliest domestic practitioner was the semi-official PayEase, formally called the Capital E-commerce Project. It was jointly launched in November 1998 by the Beijing Municipal Government, Bank of China, the State Internal Trade Bureau and central ministries, including the Ministry of Information Industry.

An independent third-party payment company called Central iPS was launched two years later in Shanghai. That was followed by a March 2002 agreement by the State Council, with central bank approval, to create Union Pay and its ChinaPay Services Ltd.

PayEase, iPS and ChinaPay followed the same basic business model by charging merchants for access to online money transfers. But the model was shaken when basically no-fee payment companies led by Alipay and Tenpay -- a service of online-game and messaging provider Tencent -- joined the race.

By doing business with platforms such as Tencent and online-shopping giant Taobao, payment companies evolved into "credit intermediaries." Going through a third party effectively resolved trust issues inherent in online transactions. And due to their interdependence, the online-shopping and third-party payment businesses developed in tandem.

Transaction levels started to swell five years ago, doubling in a year to more to 16.3 billion yuan in total market value in 2005 and building to an astounding 581 billion yuan last year. Analysys International forecasts online payment will continue to soar, reaching 886 billion yuan this year, 1.25 trillion yuan in 2011 and 1.67 trillion yuan in 2012.

Regulation delays

But the industry is practically operating in a regulatory vacuum. The government rewrote its 2005 regulatory proposal in 2007, and sources told Caixin that proposal was revised last year. The latest version includes rules for market access and risk control.

"The current copy of the regulation is completely different compared to the 2005 draft," said a senior industry source. "Because the industry is so new and growing quickly, regulators have to keep up."

Companies have long been anxious about these government delays, especially when it comes to issues surrounding business licenses. Some companies thought the central bank was rolling with a licensing process a year ago, when it started collecting records from third-party payment companies and convened a National Association for Payment Clearance meeting.

But one source said only 130 of the nation's more than 300 payment firms submitted records for the process, which reflected "the central bank's effort to collect basic information from these third-party payment companies in terms of capital, business methods and profits." And that's as far as the process went.

"In our communication process with the central bank, we expressed our hope for clarification on a few points: What can't be done, what can be done better, and what has been done wrong in the past and needs to be corrected," said Alipay Chief Executive Officer Peng Lei. "On these points, we hope for regulatory guidance."

The impending arrival of the central bank's so-called Super Online Bank has thrown another variable into the mix. The "bank" is actually an Internet application system connecting online banks to the central bank's China National Advanced Payment System.

"This is the equivalent of adding a safety valve," said a banking source. "Online banking services offered by various commercial banks will no longer individually connect to the central bank's core payment settlement system, but will instead connect through the Super Online Bank unified access point."

The Search for a Reserve Currency

By Gregory R. Copley
OilPrice.com
Monday, April 19, 2010

http://www.oilprice.com/article-the-search-for-a-reserve-currency-288.html

Currency, like all forms of abstract value, is based on trust. And trust itself is based - except among the most naïve - on experience, and the repetitive demonstration of fidelity, whether positive or negative. At present, the US dollar, which had experienced a gradual rise during the 20th Century to the position gained well into the Cold War of being the trading world’s reserve currency. It had the mass, in terms of volumes of available currency; it had the backing of an indisputably wealthy national asset base to move away from the gold standard; it had stable governmental backing.

All of that is evaporating. Not, in absolute terms, as far as the mass of currency available, because that has dramatically expanded in recent years, and particularly during the past year of the Administration of Pres. Barack Obama. Not in the underlying asset valuation of the US economy, but it has begun to erode as the productive capability of the US to extract that value diminishes due to excess governmental interference and anti-business practices. It is far to say that other countries, from Nigeria to Russia, have vast untapped underlying asset value. That they did not create global reserve currencies from their naira and ruble was due to governance failures.

However, as we are witnessing, good governance as an essential component of currency value and the trust in that currency, can transform overnight, just as we witnessed the post-World War II collapse of sterling, and, now, the shakiness of trust in the US dollar (despite the reality that, at $14.2-trillion in value in 2008, is the world's largest). The age of the US dollar as the global reserve currency is not yet over, but it is threatened, and the trend toward a flight from the dollar (despite occasional returns to it) is evident. At present, however, the dollar is shored up because in many respects there is nothing of its stature ready to replace it. This leads to the essential question:

Are we entering a period in which we may have no global reserve currency?

The People’s Republic of China (PRC) has been searching for safe-havens for its holdings of foreign earnings. The US dollar has slipped in its esteem, with some short-term benefits, perhaps for US exports, but with perilous long-term consequences. As a result, and whilst attempting to preserve the intrinsic value of its currency holdings, the PRC has been gradually scaling back its holdings in US currencies or US dollar-denominated instruments.

Where can the PRC go with its hoard? It looked at euro investments, at Canadian and Australian dollar holdings, and so on. The Australian and Canadian economic bases — at just under a trillion US dollar GDP for Australia, and about $1.4-trillion GDP for Canada — are insufficiently large to hold much in the way of PRC investments. Nonetheless, these economies have benefited from the PRC dilemma. The euro, however, is, like the US dollar, suffering from a loss of credibility, and unless some profound action is taken the euro may dramatically diminish in credibility, severely hampering the loose confederal structure of the European Union, preventing it from becoming the federal state of Europe to which some (mostly unelected) aspire.

We are, then, faced with a situation in which we may find a world without a standby currency, when, for a period after World War II, it had a couple: the US dollar and the pound sterling. It could have had more — the German mark and the Japanese yen — of the parent states of those currencies had been in a position to build a global base of trust. Now we are left in territory unfamiliar to all those now living, other than for the interregna of the World Wars.

Read the rest of the article.

Gregory R. Copley is the Editor of GIS/Defense & Foreign Affairs.

For further reading:
"Euro's reserve standing may be hit by Greek crisis", Mike Dolan, Reuters, April 7, 2010
"China Said to Consider Yuan Trading Versus Ruble, Won", Bloomberg, April 7, 2010

Why The Yuan Can't Become The World's Reserve Currency

By Ignacio de la Torre
Forbes
Wednesday, March 24, 2010

http://www.forbes.com/2010/03/24/yuan-renminbi-currency-leadership-citizenship-world.html

Far too many things would have to go right in China and wrong in the U.S.

When the country emerged as the world's superpower, after a protracted confrontation, it paid a high price. It had formerly exported capital and had its public spending well under control; now it ran extremely dangerous trade deficits and could sustain its funding only by massively selling bonds to its neighbor across an ocean to the west. That neighbor built up large trade surpluses as it accumulated those bonds. No one thought it could ever topple the superpower from its place as world leader. They certainly didn't imagine that the bond-buying nation would go on to make its money the world's reserve currency. But that is exactly what happened.

The U.S. and China today? No. Great Britain and the U.S. in 1918. The pound went into an inexorable decline after World War I that ended with the dollar taking over when the Bretton Woods agreements were worked out after World War II.

The consulting firm McKinsey recently published a study titled, "Will China's Currency Replace the Dollar as the World Reserve Currency?" It's a question many people have been asking.

There are several strong-sounding arguments in favor of the proposition. (1) America's trade deficit has been beginning to seem unsustainable, and shifting demographics mean it's only going to get worse. (2) The U.S. has incurred trade deficits repeatedly for far longer than can be explained by its having the world reserve currency, and the Chinese Central Bank has long been accumulating reserves, thanks to its trade surpluses. (3) The Federal Reserve's lax monetary policy is further weakening the dollar and threatening to trigger inflation. (4) The U.S.'s enormous and growing foreign debt might encourage the use of inflation to devalue that debt. (5) Furthermore the subprime crisis has profoundly harmed American financial systems and consumers.

But there are at least nine even stronger counterarguments. (1) The Chinese capital markets would need to have far more liquidity and transparency before investors would consider using the renminbi (China's official currency, whose unit of denomination is the yuan) as a world reserve currency, and there's no sign of that coming about. (2) The U.S. has never, in its 234 years, missed a payment on its debt. Right at the dawn of the republic, during the War for Independence, Congress concluded that nonpayment of debt would be national humiliation and must never happen. (Argentina's congress took the opposite route when it approved the nonpayment of debts in 2002, to the applause of all the legislators present.) (3) Because China is still a communist dictatorship, its fiscal and monetary policies won't respond to market forces the way a democracy's do, and that creates a strong element of uncertainty. (4) China is facing its own demographic time bomb as a result of laws introduced in the 1980s that limit the number of births. (5) China's economic growth is based on the export of low-added-value products and a controlled rate of exchange, which give it an unbalanced economy with a low level of consumerism. (6) China is effectively two countries, one urban and developed the other rural and undeveloped, and the divide between them could lead to social instability that could threaten the country's economy and currency. (7) The Chinese economy depends too heavily on exports to one nation, the U.S., and (8) has structural weaknesses because of a lack of supply of raw materials. (9) The U.S. economy relies on innovation and competition to generate productivity; without those free-market forces China's medium-term competitiveness is more uncertain.

The pound didn't stop being the world reserve currency overnight. The process started around 1870 and was completed in 1945. For the yuan to take over from the dollar, the Chinese would have to do a great many things extremely well, and the Americans would have to do a great many things very badly. It just does not make sense to bet on that happening. The dollar will continue to be the world reserve currency because, among other reasons, there is no valid alternative, especially now that the euro has been rocked by Greece's crisis.

Napoleon is reported to have said "Let China sleep. For when China wakes, it will shake the world." What Napoleon did not know was that in 1800 China represented 50% of the world's gross domestic product--and today it represents 10%, at market prices. China depends far more on the U.S. than the U.S. does on China.

Many generations will come and go before there is any chance that China's money will become the world reserve currency. It will probably never happen.

Ignacio de la Torre is a professor and academic director of the master in finance programs at IE Business School, in Madrid.

For further reading:
"Reserve currencies: Dilemma for central bank chiefs", Peter Garnham, Financial Times, March 29, 2010
"China 'will not bow on currency'", Al Jazeera, March 25, 2010
"Yuan Poised to Become Reserve Currency", Bloomberg, March 19, 2010
"Will Yuan Replace the US Dollar as the Reserve Currency of Choice?", Riaz Haq, March 18, 2010
"China's Pressing Need to Buy Gold", Vronsky, Gold-Eagle, December 29, 2009

Asia Central Bankers Say It with Gold

By David Roman
The Wall Street Journal
Monday, December 28, 2009

http://online.wsj.com/article/SB20001424052748704718204574616280863871104.html

Strong dollar equals falling gold price, right?

Except, perhaps, when Asia's central bankers are involved.

Three-quarters of the region's $5 trillion in foreign-exchange holdings are parked in U.S. dollars. A desire to diversify away from the greenback, though, has become evident. The dollar's share in reserve accumulation dropped to less than 30% in the third quarter, Barclays Capital estimates.

Admittedly, knowing exactly what is in central bank reserves takes guesswork, but analysts think most diversification in 2009 favored the euro.

Recently gold has turned up as a second alternative. The Reserve Bank of India stirred markets when it revealed it purchased 200 tons of gold from the International Monetary Fund in October, increasing gold's share of central bank reserves to 6.4% from 3.6%.

Even if other central banks don't start making large purchases like India's, they will likely remain a substantial buyer as reserves continue to pile up. In the 12 months through November, the banks added around $800 billion to their foreign-exchange holdings, a side effect of their efforts to slow the appreciation of local currencies.

China, which has seen its reserves rise by more than 50% in the past two years to about $2.3 trillion, has bought 450 tons of gold during the period, Merrill Lynch estimates. That is a substantial chunk in a market where annual turnover is about 3,800 metric tons. Accumulation of reserves by Asia's central banks will likely continue as long as strong regional growth and high interest rates continue to attract foreign investors.

A shift in portfolios, like India's, would only add to this, and there is scope for this to happen. Gold accounts for around 2% of reserves in emerging markets, Merrill Lynch calculates. That compares with a 10% average globally, and more than half of all holdings in the case of the U.S. Federal Reserve, and France's and Germany's central banks.

Asia's central bankers will move slowly, particularly with gold prices still above $1,000 an ounce. But a shift toward the global average would mean more buying -- regardless of what the dollar does.

Do We Need a New Reserve Currency?

By Emirates Business, Dubai
Sunday, December 27, 2009

http://www.business24-7.ae/Articles/2009/12/Pages/26122009/12272009_b60d075ae8834ca981282abc0ee85802.aspx

A new global currency should replace the US dollar as the international reserve currency, as the long-term deterioration of America's economy and the greenback is fuelling a "currency-regime crisis," says Martin Wolf, associate editor and chief economics commentator of the Financial Times.

Wolf, who has honorary doctorates from three universities, bases his argument in part on the Triffin dilemma, an economic paradox named after economist Robert Triffin. The paradox shows that the US dollar's role as a global reserve currency leads to a conflict between US national monetary policy and global monetary policy. It also points to fundamental imbalances in the balance of payments, particularly in the US current account.

Speaking at an event organised by the Singapore Institute of International Affairs, Wolf said Triffin believed that the host nation of a global reserve currency will inevitably run up a huge current account deficit that would consequently undermine the credibility of its currency and adversely impact the global economy. "You can't have an open globalised economy that relies for its ultimate liquidity on the currency of one country. That was his [Triffin's] argument. And, therefore, he said the Bretton Woods system would break, which it did. And exactly the same thing happened with Bretton Woods II, which is the system of pegging.

"So I agree with this. And I'm absolutely convinced now, in a way that I was not three or four years ago, that we cannot continue with a genuinely global economy which relies on national money, and that's not sold by just adding another couple (of currencies). It actually means having a global money."

Indeed, Wolf said he's in complete agreement with China Central Bank Governor Zhou Xiaochuan, who has argued for a new global currency "most credibly and convincingly."

"On the dollar, there is nothing to support this currency except the Chinese government and a few other governments that are prepared to buy it," said Wolf. "Anybody can look at the arithmetic of the fiscal deficit, the monetary policy, the external balance, which has improved but largely because of the recession -- the dollar is not adequately supported."

The US currently has a national debt in excess of $12 trillion or almost $40,000 per citizen, with a debt to GDP ratio of more than 85 per cent. In the July-September quarter, the US current account deficit rose sharply by 10.3 per cent from the previous quarter to $108 billion. In the past year, the US dollar index, which measures the performance of the greenback against a basket of currencies, has also fallen significantly.

Apart from the economic risks posed by the decline of the US dollar, China's devaluation of its currency is causing "a real problem" for Europe. The "very perverse currency adjustment" is highly destabilising for the euro zone economy and could create a crisis, said Wolf.

"There is nothing to prevent this, unless the Europeans decide they are going to intervene in the foreign currency market to buy dollars, and that would be over (European Central Bank president) Jean-Claude Trichet's dead body."

As there is "no chance" of European governments intervening in the foreign exchange markets to improve the competitiveness of the euro, it will result in major currencies such as the euro and Japan's yen becoming "very vulnerable."

"This is simply the American way of shifting the recession from them to their trading partners," said Wolf.

"What we need are global currency adjustments and it has to include the renminbi and global macro adjustments in those countries which make this less painful."

"In terms of the impact of this on the role of the US dollar as the currency of denomination for international transactions, basically I think it's become very unreasonable."

"Because the dollar, to my mind, given its underlying conditions, is no longer a credible long-term store of value," said Wolf. The decline of the US dollar underscores a phase of global power transition, with the balance of power moving from the US to Europe, China, and India, Wolf argues, adding that the greenback's loss of credibility as the dominant global reserve currency is part of this messy transition.

"The Americans no longer have the means to save themselves, this is what I think people don't understand. There is no credible American policy," said Wolf.

"We need to discuss this globally in a harmonious way. It's not happening, so at the moment the euro zone is a prime victim and it will continue to be, and that will create very big problems for European-based manufacturers, and quite particularly those that are relatively vulnerable to global price effects.

"And it's a tremendous mess, a horrifying mess, and that's where we are. I'm sorry. And we've got to get through this transition as quickly as possible to a more stable global monetary system with a lesser reliance on the dollar. We're going to get there over the next 10 years; I'm sure of it. We're going to get there. The only question we have to decide is how we're going to get there."

Meanwhile, a trade skirmish between the US and China could ensue, if Beijing continues to devalue its currency to bolster export-driven economic growth at the expense of economic recovery in the US, said Wolf.

He says China is working hard to defend the artificially low value of the renminbi in the hope that exports will pick up when external demand recovers. According to China's customs authorities, exports from January to November plunged by 18.8 per cent to $1.07 trillion from a year ago. However, according to the Royal Bank of Canada, export growth should pick up in the coming months and reach double-digits in early 2010.

China's efforts, Wolf said, will spark a "very vigorous, even vicious" reaction from the US as it's destabilising US efforts to engender an economic recovery.

Can China Beat US in Gold Reserves in 10 Years?

By David Lew
Commodity Online
Wednesday, December 23, 2009

http://www.commodityonline.com/news/Can-China-beat-US-in-gold-reserves-in-10-years-24146-2-1.html

China has set the most ambitious task on gold reserves and gold mining: take the country’s gold holdings from the current 1054 tonnes to a massive 10,000 tonnes in the next 10 years.

Is this grand task a realistic plan or a golden dream? Chinese officials say the dragon country wants to overtake the United States in gold reserves. America is the world leader in gold reserves. America owns 8133 tonnes of gold reserves that accounts for 76.5% of its foreign exchange reserves. Naturally, the Chinese plan is to ensure that bulk of its foreign exchange reserves--currently held in the forms of US dollar and bonds--is turned into gold reserves.

Unlike the United States, China has been acting slow all these years in building up its gold reserves. In 1981, China had 395 tonnes of gold holdings; it increased to 500.8 tonnes in 2001, and 600 tonnes in 2002. In April 2009, China officially announced that it has increased its gold holdings to 1054 tonnes. Since then, Chinese officials and People’s Bank of China have been meticulously chalking out plans to build up gold reserves in the next one decade.

China’s move to step up gold reserves got a moral boost when last month India—a large consumer of gold in the world—bought 200 tonnes of gold from the International Monetary Fund (IMF) for a big amount that Chinese would have never thought of purchasing. According to Zhang of the China Gold Association (CGA), India’s decision to buy IMF gold has been the real boost for China’s recent spirited moves to step up gold reserves.

“In view of the declining US dollar value, it is paramount that China steps up gold reserves. How to do this is the only question that China is debating these days. The possible steps include opening up new gold mines, aggressively going for gold mining, buying gold from the open market etc. All said and done, it is imperative that China needs to buy more gold,” Zhang points out.

China has emerged as the largest consumer and producer of gold in the world. It is, thus, natural that the Chinese mop up gold reserves to keep up its status as the No 1 gold consuming and producing nation in the globe, bullion analysts argue. In 2007, China overtook South Africa to become the world’s largest producer. The World Gold Council and global consultancy GFMS have already predicted that China will overtake India as the world's largest consumer as well.

China raised its national gold holdings in April by buying domestically mined gold. Bullion commentators like Mark Robinson are surprised as to why China has not yet shown any interest in buying gold from international markets. As a result of this, shares of Chinese gold mining companies have been rocketing all these months in the last one year. Shanghai and Hong Kong-listed shares of companies like Zijin, Shandong Gold and others are up 3x-4x this year alone. But the main factor at play is fear of a U.S. dollar devaluation.

Erik Bethel of seekingalpha.com points out the following major thrusts to explain how the Chinese appetite for gold reserves is simply rising and rising:

People in China are seriously starting to take notice of the fragility of the U.S. dollar and are loading up on commodities.

Chinese retail investors are also starting to take notice. As an example, there are "gold retail stores" popping up throughout major cities where individuals can buy mini gold bullion. There's even a China Gold Store located in Beijing Airport's new Terminal 3.

Another example is that while it was illegal to buy gold two years ago, Chinese citizens can now go to the bank and purchase "paper gold" certificates. Paper gold is basically the Chinese equivalent of an ETF and is supposedly backed by bullion held at the banks.

Chinese gold mining stocks are red hot and up 2-4x since last year.

China has US$2 trillion and is going to start deploying it in overseas mining assets.Following are also some of the major points you wish to read on China’s gold mining spree:

China’s domestic gold production has risen by 15% annually compared to the 3% decline in global production in 2006. This tremendous increase has been due to rapid capital expansion and low costs of labor. Chinese gold producers have gained enormously from the record high gold prices as investors worldwide are seeking stability due to the decline in the value of the dollar.

Domestic producers still suffer from a lack of scale. In 2000, there were about 2,000 gold producers - most of them relatively small and unsophisticated by international standards. Few are able to operate on a global platform, though the number of producers had shrunk to about 800 in 2007 after mergers and acquisitions and restructuring and consolidation. Most of these firms' technological standards and management are weak and inefficient.

China’s oldest and largest gold producer is the China National Gold Group Corporation (CNGGC), which accounts for 20% of total gold production in China and controls more than 30% of domestic reserves. CNGGC also controls Zhongji Gold, the first publicly listed gold mining company in China.

China's gold reserves are relatively small (about 7% of the world total). Production has usually been concentrated in the eastern provinces of Shandong, Henan, Fujian and Liaoning. Recently, western provinces such as Guizhou and Yunnan have seen a sharp increase, but from a relatively small base.

Zhaoyuan, a Shandong provincial city of a population of 580,000, has more than 60 gold mines operating in the hills around the city. They annuall produce about 15% of China's total gold - the most in the country.

In the last five years (2002-2007), China's Geological Survey Bureau found that five new gold deposits with reserves of 600 tons were found.

Top foreign investment has come from Canada and Australia. Though foreign investment still constitutes a very important part gold mining expansion, since 1995 it has no longer been actively encouraged by the Chinese government.

Vancouver-based Jinshan Gold Mines Inc. started production in July at its Chang Shan Hao gold mine in China's northern province of Inner Mongolia, reaching 19,000 ounces of gold by December 18. The mine is designed to produce about 120,000 ounces of gold per year, making it one of the country's largest producers.

Gold Fields and Australia's Sino Gold Mining Ltd., have set up a joint venture focused on discovering large gold deposits in China with the potential to produce about 500,000 ounces a year. Sino Gold has been buying stakes in Chinese gold deposits and explorers. In May it started production at its Jinfeng mine in southern China, with planned gold production of 180,000 ounces per year.

For further reading:
"China Set To Drive Up Global Demand For Gold", Adrian Ash, December 18, 2009

Is China Going Crazy After Gold Reserves?

By David Lew
Commodity Online
Tuesday, December 1, 2009

http://www.commodityonline.com/news/Is-China-going-crazy-after-gold-reserves-23411-3-1.html

Once again, China is making news on the hottest commodity—gold. China, the largest producer and consumer of the yellow metal these days, has announced that it wants to build up gold reserves. And how much? China says the country is eager to step up gold reserves to a massive 10,000 tonnes in the next 10 years.

Is China going crazy after gold? Yes, it looks if the recent statements coming out from the Chinese government is any indication, China is going indeed crazy after the yellow metal. In fact, gold reserves began to become big news in April this year when China announced that the country had increased its gold holdings to 1054 tonnes from 454 tonnes in 2003. Since then, almost every country—China, India, Russia, Brazil and even Sri Lanka—have been making news by announcing that they all want to build more gold reserves.

Dipping dollar value, ongoing economic recession and stock market fluctuations are the main reasons for central banks of several countries to mull mopping up gold reserves these days. India’s Reserve Bank surprised most other central banks last month by buying 200 tonnes of gold from the International Monetary Fund (IMF). India is these days once again in the fray to buy additional gold reserves from the IMF.

Why is there a scramble for gold reserves by countries like China, India and Russia? Every country these days wants to diversify its foreign exchange reserves by acquiring gold and other hard assets in place of the US dollar that has been dropping in value in the last one year.

On Monday, a top Chinese official announced that the country is eager to increase its gold reserves to 6000 tonnes in the next 3-5 years and 10000 tonnes in the next 8-10 years. Big, golden ambition, indeed. But considering the fact that China has now 1054 tonnes of gold, taking the yellow metal reserves to 10000 tonnes in the next 10 years is going to be a challenging task.

Bullion analyst Mark Robinson says this is the biggest and most ambitious task that China has ever announced. “If China wants to take its gold reserves to 10000 tonnes in 10 years, the country needs to buy or acquire the yellow metal to the quantity of nearly 1000 tonnes per year,” points out Robinson. He says China might now go aggressive on gold production as the country has allocated big funds to find new gold mining destinations.

“China wants to emerge as the global leader in gold reserves. Given the aggressive play that China is showing on gold, it looks perhaps possible that China will emerge as the biggest holder of gold in the world in the next 10 years,” added Robinson.

Which are the countries that own the largest quantity of gold reserves now? Check out here:

**America is the world leader in gold reserves. The United States has 8133 tonnes of gold reserves as on September 2008 that accounts for 76.5% of its foreign exchange reserves.

**Germany has the second highest gold reserves at 3412.6 tonnes.

** France has 2508 tonnes of gold constituting 58.7% of its forex assets.

**Italy has 2451.8 tonnes of gold constituting 61.9% of forex reserves.

**China became the fifth biggest holder of gold reserves with 1054 tonnes.

**Switzerland has 1040 tonnes of gold reserves constituting 23.8% of total forex reserves.

**India which recently bought 200 tonnes of gold from IMF has 557 tonnes of gold reserves representing 3% of total forex reserves.

** The IMF, which currently holds 3,217 tonnes of gold, is the third-largest official holder of the precious metal. The IMF has made gold sales a key element of its new income model aimed at lowering its dependence on lending revenue to cover expenses.

For further reading:
"China to Increase Its Gold Reserves", Erik Bethel, December 1, 2009
"China, gold, and the civilization shift", Ambrose Evans-Pritchard, November 26, 2009

Developing Countries Grabbing Up Gold

By Dan Weil
NewsMax.com
Thursday, November 5, 2009

http://moneynews.newsmax.com/streettalk/china_india_gold_buys/2009/11/05/282070.html

Gold purchases by emerging market nations have combined with inflation fears to send the precious metal to record highs.

The latest emerging market acquisition news was India’s agreement to buy 200 million metric tons of gold from the International Monetary Fund (IMF) for $6.7 billion. That amounts to half of what the IMF has put up for sale.

Already in April, China revealed that it almost doubled its gold reserves — to 1,054 metric tons from 600 tons in 2003.

And traders tell the Financial Times that more purchases are coming from emerging market central banks as they seek safe haven investments after the financial crisis.

Source: Deutsche Bank, "Global Commodities Daily", Michael Lewis, 4 November 2009

The central banks are expected to buy gold from the IMF to diversify their reserves away from the dollar. Analysts see China, Russia and Middle East sovereign wealth funds as likely purchasers.

China’s gold reserves now account for only about 1.6 percent of its total foreign reserves, despite recent purchases, far below the global average of 10.5 percent.

India’s acquisition means that governments as a whole may be net buyers of gold this year for the first time since 1998. That would mostly come from IMF sales.

"Central banks in India and China will be happy to accumulate gold at these levels. I will not be surprised to see even some Southeast Asian banks buying gold," Aaron Smith, Asia head of the $1.65 billion Superfund, told Reuters.

For further reading:
"Gold comfort", The Hindu Business Line, November 6, 2009
"Sri Lanka central bank buying gold to diversify reserves", Reuters, November 5, 2009