Chinese Gold Standard?Submitted by the_chiefe71 on Sat, 07/26/2014 - 17:56
International critics said that the United States, by ending the dollar link to gold, was turning its back on its responsibilities as the guarantor of the international monetary system. Over the decades, the situation has gotten worse. The United States is $17.6 trillion in debt owed to the public, and large trade deficits are the norm. Yet there is no scope for revisiting the international monetary system, despite great dissatisfaction by countries like China and the Persian Gulf states, which hold large foreign currency reserves. Americans themselves question the security of the dollar when their country faces such large trade and budget deficits.
China’s nearly $4 trillion in reserves — accumulated through its mercantilist trade policies — give it plenty of ammunition to claim leadership in the creation of a new monetary order. The Chinese, however, are most unlikely to bid for monetary hegemony in the near future. For the past 25 years they have pursued a policy of aggressive export growth to drive their economy. China successively devalued its currency, from 1.50 renminbi to the dollar in 1980, to 8.72 in 1994. (Today the renminbi trades at 6.20 to the dollar, which the United States still considers artificially low.)
Could China someday peg its currency to gold, as Britain did in 1821? China has the reserves to do this, and it could have the political will, if the dollar proved to be unreliable as a store of value in the future.
Having expanded its manufacturing base and captured international markets, China may well find a world hooked on its products. It could eventually — in, say, 20 years — peg the renminbi to gold, considering it preferable to the dollar as a store of value, because of its permanence and longevity. With a balanced budget and a gold-backed currency, China’s economy could be even more formidable than it is today. Such a move would truly mark its return as the “Middle Kingdom.”
Kwasi Kwarteng, a Conservative member of Parliament, is the author of “War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt.”