WikiLeaks: China Buying Gold To Devalue USD

 

 According to a recent WikiLeaks cable, China is allegedly buying into gold, away from the U.S. dollar, in a bid to undermine the dollars’ role as a world reserve currency.

The cable, titled “China increases its gold reserves in order to kill two birds with one stone,” together with recent policy announcements by the Chinese banking authorities indicates that China is slowly moving to replace the U.S. dollar as the world’s reserve currency. 

 

 According to a recent WikiLeaks cable, China is allegedly buying into gold, away from the U.S. dollar, in a bid to undermine the dollars’ role as a world reserve currency.

The cable, titled “China increases its gold reserves in order to kill two birds with one stone,” together with recent policy announcements by the Chinese banking authorities indicates that China is slowly moving to replace the U.S. dollar as the world’s reserve currency. 

[quote]”They (the U.S. 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 U.S. dollar or euro. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold,” said the 2009 cable.[/quote]

According to data from the World Gold Council, China holds the sixth-largest gold reserves in the world at 1,054 tonnes. 

Additionally, Zhou XiaoChuan, governor of China’s central bank, was recently quoted saying that the offshore market for the yuan is “developing faster than we had imagining.” At present, the yuan cannot be readily converted into other currencies due to heavy government restrictions. There, however, are plans to make the yuan fully convertible for international trading by 2015.

However, China’s large U.S. debt holdings make it hard for the Chinese to move away from the U.S. dollar. In March this year, the Xinhua news agency reported that China held about US$3.04 trillion in reserves. Thus, any move by the Chinese to devalue the dollar would, in effect, result in massive losses for the Chinese too. 

Related: Sino-America Power Play: Why China Has To Buy U.S. Debt

[quote] “China is locked into a position where they cannot sell a big portion of their dollar reserves overnight without hurting themselves. It is too late for now to diversify rapidly the stock they have already accumulated,” said Josh Aizenman, professor of economics at the University of California and the president of the International Economics and Finance Society, to Al Jazeera English.[/quote]

With a large reserve of U.S. dollars, China is able to effectively control the value of the yuan, which helps to maintain the low cost of Chinese exports. In 2010, the U.S. had a $273.1 billion trade deficit with China.