In a piece published today by the Council on Foreign Relations, former Fed chair Alan Greenspan examined the recent dramatic rise in gold imports by China.
He theorized that the country was likely in the process of converting its foreign reserves to gold in order to better support the use of the renminbi in international trade:
“If China were to convert a relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system. It would be a gamble, of course, for China to use part of its reserves to buy enough gold bullion to displace the United States from its position as the world’s largest holder of monetary gold. But the penalty for being wrong, in terms of lost interest and the cost of storage, would be modest,” said Greenspan.
By the end of last year, China became the 5th largest sovereign holder of gold in the world. Since then however, the country has significantly changed the way that gold is imported as well as modified the reporting policies for declaring imports, all as part of an effort to obscure their overall gold consumption. Due to the changes and deliberate obfuscation, accurate totals for 2014 will be impossible to determine.
Greenspan reiterated the importance of gold for international trade, “For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close.”
Greenspan admits that China is expected to match or surpass the GDP of the U.S. in the very near future but questions the country’s ability to surpass the U.S. technologically in the short term as well as the long-term political stability of the country. He attributes the recent stability of the country to its continued growth and ability to provide “material well-being” but suggests that if the economy stalls, stability will become less likely.
With the recent news of Democratic uprisings in Hong Kong, the stability of China could be shaken even more quickly than Greenspan suggests.