China could crash US dollar with 30,000 tons of gold: commentary

A gold trading center in Shenyang, Liaoning province. (Photo/Xinhua)

China has the ability to crash the unstable US dollar with 30,000 tons of gold reserves, says Chinese economic observer Jin Zihou.

In a commentary posted online, Jin noted that former US Federal Reserve chair Alan Greenspan once said that the renminbi could become unexpectedly powerful in today's financial system if Beijing would convert its US$4 trillion in foreign reserves into gold.

With the US dollar growing more unstable and China being America's largest creditor, Beijing could potentially crash the US dollar with 30,000 tons of gold, Jin said.

The US dollar still accounts for 60% of global foreign reserves, though there are many countries hoping to become less reliant on the US dollar. If China really wants to challenge America's place in the global trade and finance markets, it will have to do so via a significant amount of gold, Jin said.

Bloomberg estimates that since the last official announcement in April 2009, gold reserves held by China's central bank may have doubled to 3,510 tons. This would make China the second largest keeper of gold in the world behind the United States' 8,133.5 tons.

However, Alasdair Macleod, head of research for GoldMoney, states that China could have easily piled up 25,000 tons of gold between 1982 and 2003, meaning its gold reserves could have exceeded 30,000 tons by now.

It is suspected that China could be preparing the release an update of its gold reserves because the country's decision-makers appear to be trying to push the yuan into the International Monetary Fund's special drawing rights basket along with the US dollar, the euro, the Japanese yen and the pound sterling.

Beijing's attempts to internationalize the renminbi have been relatively successful, having already signed currency swap agreements with around 28 countries and establishing a yuan trading center in Zurich, Switzerland. China has also encouraged Hong Kong and London to develop into renminbi offshore markets and pushed for the Shanghai Cooperation Organisation to promote non-US-dollar trade settlements across Asian countries.

According to Duowei News, a US-based political news outlet, China is clearly preparing to brace itself from the fall of the US dollar by storing up gold reserves. It is not the only one, with the IMF still holding 2,814 tons of gold in reserves and Russia doubling its gold reserves since 2005.

If China really has 30,000 tons of gold then the renminbi will be backed by a powerful shield, Duowei said. Even if it doesn't, no one disputes that China has been collecting gold on a large scale and that its influence and position in global financial markets have grown significantly, Duowei added.

Citing estimates by the Organization for Economic Co-operation and Development (OECD), Duowei says that the Chinese economy is set to overtake the US by 2016. This historical change could see the yuan replace the US dollar as the world's No. 1 reserve currency, Duowei said.

That said, this is unlikely to happen overnight, Duowei warned, noting that China's financial infrastructure is insufficiently developed and the likelihood that China has nowhere near the 30,000 tons of gold as suggested. China may now the world's largest producer of gold with 440 tons per year and the Chinese government may be buying a lot of gold around the world, but there is simply not enough gold to go around given the high demand among Asian countries and the fact that the rest of the world only produces 2,260 tons of gold a year, Duowei added.