Funeral for the dollar
An obituary for the dollar may be premature, but China is clearly planning for a post-dollar world. The coffin is being made ready and embalming fluids are in stock.
With respect to the dollar’s demise, China’s leadership has followed a longstanding policy of not interfering with the dollar, beyond reducing its role in China’s international trade where practicable. So far, the dollar’s problems are laid entirely at America’s door. This is classic Sun Tzu: don’t interfere when the enemy is making mistakes.
That was before US trade policy took aim at China. Following 2 April last year when President Trump announced a slew of new tariffs, President Xi did a whistlestop tour of the South-east Asian nations to cement an alternative free trade area and agreed to accelerate free trade between South Korea and Japan. That was a reasonable response to US tariffs. More interesting was that the Shanghai Gold Exchange (SGE) subsequently opened vaults in Hong Kong and Saudi Arabia.
Why? It appears that China was taking the view that the dollar was finally doomed and that the yuan had to be saved from going down with the dollar’s ship. In other words, China is no longer prepared to just stand aside and let the US continue to make all the mistakes. She had to actively prepare for a post-dollar world.
A new spin on Bretton Woods
It would also be a post-fiat currency world, where trust and faith have been the important determinants of value. Trust and faith in the dollar as a medium of exchange would disappear, taking the entire fiat currency system, including the yuan down with it. Clearly, China reckons that the only way to protect the yuan’s value is to tie it to gold, perhaps in a new version of the defunct Bretton Woods system but centred on the yuan.
The details are yet to be fully revealed and will depend on events. Meanwhile, through the SGE’s new vaults in Hong Kong and Saudi Arabia, an exchange facility for yuan for gold and vice-versa is established for the two main Asian wealth regions. And only in the last few days Hong Kong’s regional government and the Shanghai Gold Exchange have agreed to launch a cross-border precious metals trading and clearing system with an initial reserve capacity of 2,000 tonnes.
The intention is clear. China will be the pricing centre for gold following the demise of London and New York and their fiat currencies. It was likely that Xi briefed China’s
