As golden opportunities go, China’s Xi Jinping is being offered one that Asia’s biggest economy must not miss.
The opening in question is the gold-buying surge by the most powerful central banks. In 2018, in fact, they bought the biggest blocks of the yellow metal since Richard Nixon’s day.
The 651.5 tonnes they hoarded – spending nearly US$28 billion – was 74% more than 2017 and it was the most since 1971 when then-US President Nixon ended the gold standard.
Central banks are famously reticent about gold reserves. It’s not hard, though, to divine what Russia, Kazakhstan, India, Turkey, European nations like Poland and Hungary, and others, are doing.
They are registering concerns about the dollar.
In 2018, US President Donald Trump implemented a budget-busting $1.5 trillion in tax cuts the economy did not need. He started a trade war with China, brawled with his Federal Reserve, attacked law enforcement, the judiciary and the legislature and signaled an end to a 24-year-old strong-dollar policy.
He also hinted at military interventions from Iran to Venezuela.
Central banks, one can argue, are acting completely rationally as US debt blows past $22 trillion. Trump’s Republican Party is talking new tax cuts even as the US Treasury bangs the cup to sell another $1 trillion of debt this year following $1 trillion in 2018.
This should be China’s moment – if President Xi can rise to the challenge.
A key Xi ambition is replacing the dollar as the reserve currency. That quest bore serious fruit in 2016 when the International Monetary Fund included the yuan in its “special drawing rights” matrix. That instantly made it a top-five unit of exchange.
Even better, Beijing’s presence in the IMF’s most exclusive club required a reformist quid pro quo. That was the masterplan of Zhou Xiaochuan, the head of the People’s Bank of China from 2002 to 2018. He was China’s most important reformer since the days of his mentor, Zhu Rongji, who was premier from 1998 to 2003.
And Zhou viewed the IMF conclusion as a Trojan horse, of sorts.
Once inside Beijing’s walls, he believed, the Communist Party would be obliged to loosen the capital account, increase transparency, curb asset bubbles and let the yuan trade more freely.
The dollar, and the trillions of dollars of Treasuries that Asian governments hold, is unlikely to survive today’s Trumpian chaos intact.
Failure to comply would prove embarrassing and subject Beijing to the whims of speculators.
Things haven’t gone according to plan. Though China has indeed let some market forces play, in Xi’s words, a “decisive” role, it’s still too opaque for prime time. Its tolerance for a flexible yuan rate is limited, at best. And Xi’s government is reopening the stimulus spigot as Trump’s trade war slams mainland growth.
Why not use this window to regain the reformist momentum? Central banks’ voracious appetite for gold demonstrates growing worries about the anchor of global finance. The dollar, and the trillions of dollars of Treasuries that Asian governments hold, is unlikely to survive today’s Trumpian chaos intact.
That doesn’t mean a dollar crisis is coming. Nor does it mean Moody’s Investors Service and Fitch Ratings will yank away Washington’s AAA status, as Standard & Poor’s did in 2011. Of course, neither risk can be ignored.
Not when the largest economy and the most powerful military are in the hands of a truth-challenged former reality-television star whose businesses filed for bankruptcy at least four times.
Yet, Xi should use this moment to introduce a burst of multi-tasking. Sure, let the PBOC and local governments support growth that last year slowed to its lowest rate since 1990.
Xi also should supersize the mandate of his economic czar, Vice-Premier Liu He, to pull another Zhu Rongji.
In his five years on the job, the earlier-mentioned premier disrupted the state sector as never before. Zhu worked to make local government officials more accountable, modernize the banking system and guided Beijing into the World Trade Organization.
Liu doesn’t need to fire 40 million workers as Zhu did. But it’s high time China accelerated efforts to move tens of millions of jobs from the public to the private sector.
It’s high time, too, that Beijing loosened its grip on the financial system, strengthened corporate governance and attacked graft.
Xi should rethink clampdowns on the media and the internet, which are natural allies if he is serious about cleansing China Inc.
Respect for the yuan would grow from there. So would the currency’s use in trade, financial transactions and mergers and acquisitions. And as we see from gold’s sudden bull run among central bankers, the world is keen on an alternative.
Japan’s economic trajectory is heading the wrong way for the yen to replace the dollar. The euro?
Despite European Union President Jean-Claude Juncker’s best efforts, the common currency has done more to exacerbate the region’s cracks than fix them.
That, President Xi, leaves the yuan – if you’re ready to increase its luster as a global anchor. A golden moment, indeed.