THE BLOG
15/11/2013 06:29 GMT | Updated 23/01/2014 18:58 GMT

China's Stealth Move in the Currency Wars

Five years on from the Great Financial Crisis and whilst it might feel like little's changed for us as individuals, different nations and their central banks are engaged in heated currency wars. In a race for exports and to inflate away huge debts it often looks like a game to print as fast as you can.

Five years on from the Great Financial Crisis and whilst it might feel like little's changed for us as individuals, different nations and their central banks are engaged in heated currency wars. In a race for exports and to inflate away huge debts it often looks like a game to print as fast as you can.

However, amidst all this China is stealthily pursuing another strategy, little noticed by most in the West.

Whilst ensuring her banking system has sufficient liquidity, China is quietly accumulating stunning amounts of gold bullion. The Chinese authorities are also actively encouraging their citizens to stock up on gold bars too. Some of the most powerful politicians, bankers and academics in China are overseeing China's gold plan.

China has identified gold as a strategic financial asset and is acting on this conviction.

Explaining China's gold fever

Like many exporting, mercantile nations China has been building up large reserves in other currencies, most notably in US dollars. Like other holders of dollars China is vulnerable to Federal Reserve money printing, which devalues her hard earned national savings. After experiencing such devaluations in her savings, and with the long-term goal of launching the yuan as a global, reserve currency, China has naturally looked for alternative savings, less affected by inflation. Hence the focus on gold.

This is not something China has done in a knee-jerk reaction after the crisis of 2008, although this phenomenon has got a lot more impressive to behold since then.

In the late 1990s China was already paving the way for more use of gold in the Chinese economy and banking system. In the early 2000s things started to hot up, before even greater developments over the last five years really attracted attention. This infographic shows the trend evolving.

What's the end game for China?

In the short term China is looking to safeguard the value of her reserves, whilst in the medium and long-term she is looking to grow beyond American and Western financial power.

To meet her goals in the short-term China has not just been buying gold but also mines and mineral interests around the world. She wants to own real assets during a time of heavy currency debasement.

In the longer term gold is a crucial part of her strategy too.

Understanding the power and privilege of owning the world's reserve currency - something the Americans have enjoyed for over 50 years - China is looking to make the yuan a challenger to the US dollar. China wants a future where more trade is conducted with her currency than the dollar and to achieve this she needs to make her own currency the more attractive option to use.

Replacing the dollar

To make the yuan more attractive than the dollar China needs investors and speculators around the world to believe the yuan is safer and sounder.

China can achieve this by printing less and restricting supply of her currency, making it relatively more attractive compared to other more debased alternatives.

China can also back the yuan with gold, as the British pound and US dollar were for great stretches of their dominance. Holders of yuan can then go to the Chinese central bank and trade it in for gold bullion if they think supply of the currency is not being managed responsibly enough. This is why many in the gold market believe China is piling up gold in the vaults of the Peoples' Bank of China.

China is going back to the old-school when it comes to money.

Although this trend is something much commented upon in niche, gold market circles, it's amazing how little of the wider public are aware of what China is really up to here.

China has identified gold as one of the trump cards in the currency wars. She's now hard at work making her trump cards count.