Beijing needs to prepare for emergence and development of a new global monetary system

Source:Global Times Published: 2019/9/22 19:18:40

Illustration: Xia Qing/GT

With increasing risk aversion in the global financial market, 2019 marks the beginning of a new bull market in gold. Thus far this year, the spot gold price is up by more than 20 percent, and is the most popular safe-haven asset in 2019. As investors are buying into gold, central banks of more than 30 countries including China and Russia have also increased their gold holdings. According to the latest statistics, by the end of August, China's gold reserves reached 62.45 million ounces, with a market value of about $95.5 billion. August also marked the ninth consecutive month that China increased its gold reserves.

After experiencing unprecedented monetary easing, asset prices have already risen to a very dangerous level. Some believe that China's increase in its gold reserves and the rising ratio of gold reserves to its foreign exchange reserves represents its efforts to diversify international reserve assets. Compared with the international average, China's proportion of gold in international reserve assets is relatively low. As of the end of March, the global average was 13.5 percent, while China's was only 2.5 percent. Therefore, China has reason to increase its gold holdings.

However, from the perspective of the world financial system and geo-economic evolution, asset diversification may only be part of the cause behind the pursuit of gold by global central banks. In fact, as the US tends to be conservative and the dollar is increasingly "politicized," many countries have considered "de-dollarization" for the global monetary system. Mark Carney, governor of the Bank of England, recently said that the world's reliance on the US dollar "won't hold" and needs to be replaced by a new international monetary and financial system based on many more global currencies.

But could the change in the dollar and the pursuit of gold mean that the international monetary system will return to the "gold standard" system? While gold will still play an important role in the era of credit money, the development of modern politics, economy and society, the development of global investment and trade, and the deepening globalization will inevitably require the continuous expansion of the international monetary and credit systems. The "gold standard" cannot meet such needs. Today's monetary system is more likely to be a floating gold-based foreign exchange standard system so as to meet the needs of credit and trading expansion. In the meantime, it should be noted that currencies have strong geopolitical attributes that represent and reflect geopolitical influence. Modern geopolitics is actually geo-capitalism, and currencies have gradually evolved to be financial symbols loaded with geopolitics.

Another change in the international monetary system is the rise of digital currency. The development of internet technology and the digital economy means that the anchor of currencies needs new credit symbols while getting rid of the "gold standard." Digital currency will become an important credit carrier in the international monetary system in the future. A variety of digital currencies launched by multinationals based on their own corporate credit are posing challenges to central banks. In fact, digital currency will also be an external form (like gold coins, banknotes) of geo-currency, which will compete with the sovereign currencies of various central banks, reflecting the influence of geo-capital. Its rise will be an inevitable trend in the "post-gold standard" era.

As a rising economic power, China also needs to prepare for changes in the international monetary system during the "post-gold standard" era. While maintaining close ties with the US dollar, China's monetary system should pursue diversification or multiple-support from the gold standard, digital currency, the dollar and a basket of other currencies. The US dollar remains the major geo-currency. Particularly in the case of global excess liquidity and increasing risk, de-dollarization is not a realistic choice. Meanwhile, increasing gold reserves should be seen as a strategic measure aimed at enhancing the ability to cope with various risks and maintaining the stability of yuan credit. 

Additionally, by swapping with other major currencies, China could increase its reserves of a basket of currencies. This is not necessary to deal with geopolitical changes, but also offers financial tools and expands the space for diversified trade and investment cooperation. China still needs to facilitate the yuan's internationalization and continuously enhance its geographical influence so as to create market space for the development of China's geo-currency.

Furthermore, China needs to be prepared for the development of digital currency so that it can support the yuan. While actively establishing its own sovereign digital currency system, China should consider encouraging the development of a market-oriented digital currency to adapt to changes in the digital field and the formation of a new "digital geopolitics."

The growing interest in gold from financial markets and central banks not only indicates the market's risk-aversion sentiment, but also means that the dollar-dominated, international monetary system is developing toward the geo-currency system. Under these circumstances, China needs to make adjustments to keep up with the currency development trend while still maintaining deep ties with the US dollar.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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