The Chairman of the China
Gold Association and General Manager and Party Committee Secretary of
China National Gold Group Corporation, the latter being China’s largest gold
mining enterprise, is Song Xin and happens to be one of my favorite
commentators in China. This gentleman made waves in July 2014 when he
candidly wrote on Sina
Finance that the People’ Bank Of China (PBOC) should slowly raise its
official gold reserves to 8,500 tonnes, more than what
the US Treasury claims to hold. The article was published in Chinese but translated
by BullionStar to share the views by Song Xin with the English speaking
world:
For China, gold’s strategic mission lies in the support of renminbi
internationalization, and so let China become a world economic power and make
sure that the China
Dream is realized. … gold forms the very material basis
for modern fiat currencies.
Gold is the world’s only monetary asset that has no counter party
risk…
That is why, in order for gold to fulfill its destined mission, we
must raise our gold holdings a great deal, and do so with a solid plan. Step
one should take us to the 4,000 tonnes mark, more than Germany and
become number two in the world, next, we should increase step by step towards
8,500 tonnes, more than the US.
In the next translation further below you will read more on how Song Xin
views gold’s role in China’s financial strategy. The bullet points from the
article:
- China continuously accumulates gold reserves to support
and accelerate renminbi internationalization.
- Renminbi confidence and gold are closely related. Gold
reserves are the cornerstone for renminbi internationalization.
- In modern times gold plays an important role in managing
economic risk and maintaining China’s financial safety.
- China is continuously increasing its official gold
reserves in conjunction to joining the SDR.
- The ratio of China’s official gold reserves to its GDP
should be more in line with the US and other developed countries. At
this moment China’s official gold reserves are still relatively low.
- The
Silk Road economic project, also called “One Belt and One Road”
(OBOR), has huge development opportunities for the Chinese gold
industry. Song Xin mentions that the in ground gold reserves of
countries along OBOR reach 21,000 tonnes. In 2015, witnessed by Chairman
Xi Jinping and President Putin, China
National Gold Group Corporation and Russia’s largest gold mine Polyus
have signed a strategic cooperative agreement and they are promoting
detailed relevant cooperative issues at present.
What he didn’t mention is that China is striving to boost gold
trade along OBOR to be settled in renminbi through the Shanghai International
Gold Exchange.
Is The SDR A Means Or And End For China?
In the mainstream media we often read China wants the SDR to replace
the US dollar as the world reserve currency, based
on statements from PBOC Governor Zhou Xiaochuan – among others:
Special consideration should be given to giving the SDR a greater role.
The SDR has the features and potential to act as a super-sovereign reserve
currency.
Since 2009 China has vigorously pressured the IMF for renminbi
inclusion into the SDR. Finally, in 2015 the IMF decided the renminbi would
be added to its currency basket in October 2016.
Zhou and other
prominent economists at the PBOC are clearly pushing the SDR, but what’s
China’s exact strategy?
In advance of the official inclusion of the renminbi into the SDR, which
will take place on October 1, 2016, developments regarding the International
Monetary Fund’s synthetic reserve currency are unfolding rapidly.
Author of the Big
Reset, Willem Middelkoop, reported this August a “Substitution
Fund” is being discussed in the higher echelons of the monetary elites,
to facilitate dollar exchange for SDRs outside the market, and thus creating
an escape from dollar reserves without putting downward pressure on the
dollar.
Also in August, The PBOC allowed a
division of the World Bank (the IBRD) to
issue bonds denominated in SDRs in the Chinese market. The bonds
worth $2.79 billion dollars can be created “soon”
– presumably within a month. In addition, the
Chinese government-linked China Development Bank will issue SDR notes
worth somewhere in between $300 million to $800 million dollars. Both issues
are “SDR-denominated
financial market instruments” called M-SDRs by the IMF. Though experts
think the M-SDRs will encounter many practical challenges when
implemented and demand will be tepid, nevertheless the intention by the PBOC
to launch these instruments is clear.
On the surface we can observe China has a vast interest in the SDR, but is
the SDR a means or an end for China? What if China is simply using the SDR as
a vehicle to achieve other objectives? For example:
- Dethroning the dollar. The SDR can
be an excellent tool to unwind the dollar hegemony. In addition the
Substitution Fund could help an orderly exit from China’s
lob-sided dollar reserves.
- Internationalize the renminbi.
Inclusion of the renminbi into the SDR boosts global renminbi acceptance
as a reserve currency.
- Reduce capital outflows from China.
With respect to M-SDRs, David Marsh of financial think tank the Official
Monetary and Financial Institutions Forum (OMFIF) wrote:
Beijing’s SDR capital market initiative will allow domestic Chinese
investors to subscribe to domestic bond issues with a significant foreign
currency component, which will help dampen capital outflows…
I think for China the SDR is just a means to an end. The end being to
internationalize the renminbi, which of course is connected to the dollars
retreat. And as Song Xin clearly states, “gold forms the very material
basis for modern fiat currencies” and, “gold reserves should become
the cornerstone … for renminbi internationalization”.
In my humble opinion the financial crisis has shown (once again) the
inherent flaws of all fiat currencies. A bundle of some of these
currencies will not solve the problems ahead of us; at best provide tools or
a next level printing press.
I find it interesting that Song Xin mentions the importance of the ratio
between China’s official gold reserves and GDP. This concept was also brought
forward by Jim Rickards. If the PBOC would have 5,000 tonnes of official
gold reserves their “gold
to GDP ratio” would be roughly on par with to the US, Europe and
Russia. One of the theories about our current international monetary
system – that was detached from gold in 1971 – is that it can shift to a new
gold anchored system when the power blocks have equalized the chips
(Jim
Rickards). In other words, if the US, Europe, Russia and China all have a
roughly equal ratio of official gold reserves to their GDP, the international
monetary system could make a transition towards gold.
According
to my estimates the PBOC has roughly 4,000 tonnes in official gold reserves,
in contrast to what is publicly disclosed at 1,800 tonnes. Perhaps
the PBOC is “nearly there”.
Song Xin who was also a speaker at the “Renminbi
Internationalization and China’s Gold Strategy Seminar” in Beijing
on 18 September 2015.
Original source
of the article below is the China Gold Association website. [Brackets
added by Koos Jansen]
Song Xin, Chairman of the China Gold Association, General Manager
and Party Committee Secretary of the China National Gold Group Corporation:
Stick to the gold mission and boost innovative development
March 14, 2016
As the sole central enterprise in the gold industry, China
National Gold Group Corporation is a firm defender of renminbi
internationalization, pioneering demonstrator of the country’s “One Belt and
One Road”, and faithful guardian of a happy life for people. It’s
the direction that we should strive for.
On March 10 during the two assemblies, Song Xin, Chairman of
the China Gold Association, General Manager and Party Committee Secretary of
the China National Gold Group Corporation, was the guest in Xinhuanet’s 2016
two assemblies special Interview. In the program Dialogue with New
State-owned Enterprises and Cheer up in the “13th Five-Year Plan”,
he proposed the conclusions above. Besides, in the in-depth
dialogue, Song Xin systematically illustrated topics including the functions
of renminbi internationalization, effectively enhancing gold supply,
realizing improved quality and efficiency of enterprises, practicing the
central party’s “Five Development Theories”, and fulfilling the
responsibilities of central enterprises.
About Gold’s Functions: Increase Gold Reserves And Accelerate
Renminbi Internationalization. A Close Relationship between Increasing
Gold Reserves And Joining The SDR
When the credit lines of paper currency declines and there are
enough gold reserves, people can be less worried about the existing credit
system and enhance their confidence in the currency.
Last year, China joined the IMF (International Monetary Fund)
Special Drawing Rights (SDR), signifying the renminbi’s march towards
internationalization.
Song Xin pointed out that the renminbi is closely related to gold.
Gold is priced in US dollars throughout the world and in renminbi in China.
There is a special relation between the renminbi and gold. We have
continuously increased gold reserves since China strove to join the SDR
basket of currencies. By the end of February this year, our gold reserves
have increased to 1788.45 tonnes. In other words, China has continuously increased
its official gold reserves and publicized the amount to the world, keeping a
close relation with renminbi internationalization and joining the SDR.
Further increase gold reserves to adapt to economic strength
China’s existing gold reserves are only about 1/5 of America’s.
With the acceleration of renminbi internationalization, the renminbi should
further increase its gold reserves in order to reach a level matching the
national economic aggregate [GDP], especially if the renminbi wants to become
a global currency.
Song Xin mentioned that China’s gold reserves once maintained
around 1,054 tons. In the second half of last year, it started to increase
these reserves substantially. Now, it has been increased by 70%. The increase
range is big, but small compared to that of developed countries. At present,
our economic aggregate [GDP] reaches second place in the world, but our gold
reserves only reach the sixth place in the world. If the IMF’s reserves are
excluded, China’s reserves rank in fifth place according to national rankings.
Possessing sufficient gold can strengthen confidence in a
currency
Song Xin said, “There is a remarkable distance between China’s
gold reserves and America’s gold reserves. America’s gold reserves are 8,133
tons and it even reached over 20,000 tons before. In those days, America
controlled most of the gold in the world, which laid an important foundation
for the US dollars to become a global currency.”
Before the Bretton Woods system was disintegrated in the 1970s,
gold was directly connected with the US dollar. After the Bretton Woods
system was corrupted, gold was disconnected from the US dollar, but America
still kept sufficient gold reserves.
Song Xin believes that it has a relation with the global governing
system. When the global economic aggregate was not so big, the gold standard
had a certain advantage. With the expansion of the economic aggregate, the
Bretton Woods system was disintegrated, and gold was disconnected from the US
dollar. America announced that gold was unimportant then under this circumstance.
However, in fact, when a financial crisis happens in America, its gold
reserves don’t reduce at all. Americans firmed up people’s confidence in the
US dollar by sufficient gold reserves.
Talk about supply reform: increase the effective supply of gold
to boost quality and efficiency of enterprises rather than excess
capacity, the gold industry needs to increase supply
In 2015, our domestic gold mine output reached about 450 tons,
ranking the top in the world for nine consecutive years. Meanwhile, gold [retail]
consumption reached almost 986 tons, surpassing India for three consecutive
years and becoming the largest gold consumption country in the world.
Song Xin mentioned that our gold production can’t satisfy consumption
demand and it doesn’t include the central bank’s reserves. Therefore, for the
gold industry, increasing gold production and rapidly supplementing the gap
above are the important missions for the gold industry.
Regarding how to increase the effective supply of gold, Song Xin believes
that enterprises in the gold industry should offer more suitable marketing
paths, especially customers’ favorite gold jewelries and gold investments
with cultural connotation and innovation.
…
…
Maintain national financial safety and fulfill political
responsibility
“The political responsibility of the China National Gold Group Corporation
is to make enterprises strong, excellent and big. Besides that, it is also to
allow staff to enjoy the achievement of enterprise development. More
importantly, it is to increase the effective supply of gold, to satisfy the demands
of people and country for gold products, and to maintain the healthy and
harmonious development of the industry”, said Song Xin.
Song Xin introduced that gold played a very important role in
different historical periods. In the revolutionary war period, the
underground party delivered abundant gold to Yan’an from the Jiaodong base
area in order to get medicine and materials, playing a positive role for the
Communist Party to gain victory. In the beginning of reform and opening up,
the country’s foreign exchange was in a shortage and our country vigorously
increased gold productivity, once amounting to 70% of the whole country’s
foreign exchange reserve which is mainly for gold swap transactions and
purchasing devices, etc. and guaranteeing foreign exchange demand of economic
development. In the new era, gold has played an important role in resisting
economic risk, maintaining the country’s financial safety and assisting with
renminbi internationalization.
Song Xin thinks that the China National Gold Group Corporation
shoulders the important mission of increasing gold reserves and production
and adding trust for renminbi internationalization for the country. He said,
“Gold reserves should become the cornerstone or ballasting stone for renminbi
internationalization, which can improve the gold content of renminbi. In
these aspects, the China National Gold Group Corporation is obligated to
fulfill its own political duty.”
…
Talk about “Five Major Development Concepts”: Explore Profound
Meaning Based on Practical Conditions for Enterprise.
…
Make achievement in the “One Belt and One Road”
With the implementation of “One Belt and One Road”, the China
National Gold Group Corporation can accomplish a lot in “going out” and
“going out” is an important constituent of our reform and opening up in the
new era. “One Belt and One Road” has brought huge development opportunity for
Chinese gold industry and enterprises. Song Xin mentioned that the gold [in
ground] resources of countries along the “One Belt and One Road” reached
21,000 tons, taking up 41.5% in the world. The gold production of countries
along the line reached 1,116 tons, occupying 1/3 in the world. In addition, 6
gold mines are located here among top 20 gold mines in the world.
“The consumption amount of gold jewelry in the area accounts for
82.4% of the global consumption amount. Physical gold item demand including
gold bars takes up 77% of the global demand. Gold resource development
potential and gold market consumption potential in the area are quite huge,
bringing important strategic opportunities for Chinese gold enterprises”, he
said.
Song Xin introduced that the China National Gold Group Corporation
is constructing mines in Kyrgyzstan and Congo. Last year, witnessed by
Chairman Xi Jinping and President Putin, China National Gold Group Corporation
and the largest Russian gold enterprise have signed a strategic cooperative
agreement and they are promoting detailed relevant cooperative issues at
present. Meanwhile, they are preparing to export devices to countries along
the “One Belt and One Road” including Russia and Kazakhstan. In the practice
of open concept, China National Gold Group Corporation is comprehensive and
systematical.
…
