China’s affection for gold is proving robust in 2021, according to data published by the China Gold Association or CGA. The CGA says that between January and September this year China bought 813.59 tonnes of gold, more than 48% higher for the same period than in 2020. That’s already close to the figure for the full year’s consumption in 2020, which was 820.98 tonnes. In 2019, the figure was 1,002.8 tonnes.
Gold jewellery purchases during January-September went up by 54.21% (to 529.06 tonnes); gold coins and bars went up by 50.25% (to 214.13 tonnes); and gold for industrial uses went up by 12.66% (to 70.4 tonnes). During the same period China’s gold production was 236.75 tonnes, a year-on-year fall of 26.18 tonnes.
How much of China’s gold is in private hands and how much belongs to the state? It’s a fascinating and probably unanswerable question. The World Gold Council (WGC) says China has 1,948 tonnes of official gold reserves but other sources put Chinese gold ownership – and official reserves – much higher.
Why is China accumulating gold? It’s no secret that China wants to displace the US Dollar as the world’s international reserve currency, perhaps with a gold-backed digital currency. China’s central bank – the People’s Bank of China or PBoC – is elaborating the country’s Digital Currency Electronic Payment (DCEP), the e-CNY, which is due to be formally introduced at the next Winter Olympics, in Beijing, in February 2022.
At the 4th Digital China Summit in April this year, the PBoC showcased a machine prototype which can convert 16 foreign currencies into e-CNY. Visitors to China or returning nationals with valid passports can place foreign banknotes into the machine, which will then issue a physical e-CNY card based on the prevailing exchange rate. The card prototype can be used in retail shops that have an e-CNY payment terminal.
More than 25 million eWallets are now in use in China and able to use the digital e-CNY. China has made all private cryptocurrency transactions illegal but its state-controlled digital currency is steadily going to become the de facto method of payments for all Chinese.
This has profound implications for not just China but the world. For one thing the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, which currently governs cross-border transactions between banks, may become obsolete. SWIFT is overseen by the G-10 central banks (Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, United States, Switzerland, and Sweden), as well as the European Central Bank, with its lead overseer being the National Bank of Belgium.
Governments could also have direct visibility of financial transactions instead of having to ask banks to provide data. The long-term potential of the e-CNY could be that it undermines the US Dollar by enabling countries that are sanctioned by the US (and deprived of Dollars) to trade more easily and directly with China. It’s likely then, that the US will also gradually lose its ability to enforce trade penalties against companies such as Huawei.
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