China goes for the (non-Olympic) gold

Goldbugs and currency speculators are excited by a Chinese announcement that it is increasing its reserves of the shiny yellow stuff. Should the U.S. be alarmed?

Published April 24, 2009 5:36PM (EDT)

So China announces that it has doubled its state-owned reserves of gold, and immediately some commentators can't resist the impulse to shove the news into the context of a Chinese versus U.S. battle for world currency domination.

Edward Harrison writes:

So, here we are, three weeks out from the G-20 and now we learn the Chinese have been buying gold. In my mind, there is no doubt that China is looking to topple the U.S. dollar as the world's reserve currency. And this will happen over time. The Europeans want it -- they are a rival in currency terms. The Asians want it -- they want to stick it to an arrogant country which caused great hardship to Asia through the IMF in the Asian Crisis. And the oil exporters like Saudi Arabia, Iran and Venezuela all want it too. It will happen. The question is when and what will replace the dollar.

But I'm not so sure every move China makes needs to be considered as part of a plot to dislodge the U.S. from its global economy roost. Everyone agrees: China's foreign reserves are far too concentrated in U.S. dollars. A little (or a lot) of diversification makes sense. But even now, with China becoming one of the top five national holders of gold in the world, the shiny stuff only represents 1.6 percent of its nearly 2 trillion worth of reserves. The vast majority of the rest of China's holdings is still in dollar-denominated assets like Treasury bonds.

Which leaves China in exactly the same position it was before it announced its burgeoning gold stockpile -- extremely dependent on the U.S. dollar staying strong. If I was China, that would make me nervous, given that in the long run, a bout of inflation in the U.S. is not out of the question, and the value of the dollar could slide. But I still don't think China really wants to do much to hasten that day's arrival.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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