How Hong Kong Tells Us That Cash and Financial Instruments Aren’t the Answer To long Term Financial Stability
China has long been known as the new kid on the block. It has been competing with the United States on a level that needs to be taken seriously now.
If the GDP is analyzed in terms of purchasing power parity of the citizens, China’s is almost the same as that of the US. The army is bigger! It might not be the same level of powerful, but it is well on its way to get there.
There is another lesser popular macroeconomic indicator where the Chinese might just take the lead soon—the country’s dependence on gold instead of cash and financial instruments! For the longest time, China continues to be world’s leading producer of gold—hitting 404 tons last year.
Here is what we have to learn from China:
China’s love affair with gold
The nation demands, purchases, and uses gold like anything! The demand went up by 10% last year and the figure hit an all-time high of 700 tons. Out of this consumption, 60% could be attributed to ornament and jewelry demand.
However, it’s not all about glitters, gems, and jewelry. The figures indicate that China is gearing up for a major trade war escalation with the United States.
It did so by buying nearly 10 tons of gold in July 2019—this was the eighth consecutive month of the country adding to its gold reserves. At the moment, China holds around 62 million ounces of gold.
This is equal to reserves worth $93.4 billion, if one considers current prices. China is playing clever. All they’re trying to do is protect themselves from major trade-war fallout and to keep the value of the Yuan intact.
The government of China is neither hoarding up huge reserves of cash nor overly investing in foreign projects to secure their position against the US but have chosen to use gold as their weapon.
China’s road to financial stability
As a part of China’s greater strategy to strengthen their financial stability, the country is focusing on balanced growth and sustainability.
The country has opted for diversification as a way to overcome financial conflict with the US and internalize the Yuan.
While America continues to target the US financial markets for their huge Yuan reserves, China is banking on gold reserves.
All the transactions in China are currently focused on market stability and risk control. Although Honk Kong continues to be world’s largest offshore Yuan foreign exchange, the country is still not issuing central-bank notes the way they would be expected to.
While the US continues to interfere with the OBOR initiatives, China is focusing on strengthening their Yuan reserves by backing it up with the power of gold.
In short, thanks to gold, China is ready for a stronger Yuan while the US is trying to follow up with a weak dollar policy.