China: Control the gold

I was reading idly the Annual report on exchange arrangements and exchange restrictions and discovered an interesting little fact about the Chinese monetary system:

By law, all gold produced in China is sold to the PBOC, which in turn sells it on to those wishing to use the gold jewelry, industrial or other purposes. Since most currency in China (like elsewhere) is paper money, the original purpose of the law (to ensure supply of precious metal for coin) is forgotten and this must just be a nice way of taking a cut for the Bank.

It sort of makes sense too in that it forces Chinese mainlanders to settle in RMB. If inflation becomes a bigger problem for people, they will not be happy with that but the government at least keeps control (esp as the standing committee runs the PBOC). Contrast that with what is happening Vietnam as the Dong inflation is driving people to settle debts in gold and other metals.

No doubt there will be other random posts on China shortly...

Yuan as leader, but a race to the bottom?

If M. Ariff is correct, and Malaysia and Thailand find that they have no choice but to peg their currencies to the RMB in order not to be disadvantaged as the USD falls, then the race to the bottom is on in East Asia. I doubt it comes to that, but in the event that it does, it will be the end of East Asia's chances of financial regionalism. A switch to RMD would be the biggest story in international political economy since the USD took over from the pound Stirling as the world reserve currency.


Pegging to the dollar is simply a "begger-thy-neighbour" policy. It is important to note that these distortions will not just damage the US, but also each countries' regional neighbours. Thus, the pain will be felt door in Indonesia if Malaysia pegs to the RMB, in the form of lost export market share and therefore higher unemployment. If Malaysia or Thailand were to peg to the RMB, it could potentially trigger others to do likewise in order to avoid the pain.


Pegging to the USD is simply opting out of the region, and pegging to the RMB would have similar effect. If more economies start to proxy dollarize via a peg to the RMB, exchange risks would come down and exports would go up. East Asian central banks would lose control of the interest rate lever and the US would start piling on more debt.

Due to this, gone would be the incentive to see financial risks and burdens be distributed throughout the region on market basis, as each country sets about politically manipulating its exposure. Gone too then would be the precious trust which underlies the international economy.

China peg's is simply no longer a domestic concern - as if it ever were. The solution is not for others to peg to China but for China to either move to a basket of currencies that actually includes more than the USD (it current "basket" adopted in 2005 is really all USD) such as the Yen, Euro and etc or to go with a pure float.

To realise the insanity of the situation imagine what would happen if the US started to peg to the RMB as its sovereign right?