China Gold Deposits to the IMF

Economics, Geopolitical, Premium POM13 Comments

The Lima Accord and Gold Valuations

By JC Collins

When the Bretton Woods Agreement was arranged in 1944 the member countries placed their gold reserves on deposit with the Federal Reserve to back the new dollar based system. This arrangement fell apart only a few decades later as the imbalances inherent in using a domestic currency as the international reserve asset put increasing pressure on the USD.

Over the last few years gold has been once again moving around the world in vast quantities, leaving many questioning the reasons for large Chinese accumulation and gold repatriation demands by former signatories of the Bretton Woods arrangement.

There are no clearer signs that the world is once again in the middle of an economic transition than those two events. The clear end of a USD based system is gaining momentum on the swell of gold movement and increasing systemic imbalances. What was once considered the mainstay of economic stability, being the dollar, is quickly, and for the most part, quietly, being repositioned as one of many domestic reserve currencies which will depend on the availability and stability of the more macro SDR supra-sovereign reserve asset.

When we consider the architecture of previous monetary frameworks, gold almost always plays a very important part in the initial stages. At least overtly. And in time as the systemic imbalances increase, the support of gold is removed to allow for the unrestrained expansion of the money supply.

The use of the SDR as a method of returning stability back to the monetary system will also depend on the utilization of gold. Whether countries partially support their domestic currencies with gold (as the USD did at $35.00/oz under Bretton Woods), or gold is added directly into the SDR composition, its importance cannot be denied. This conclusion is supported by the large movement of gold which has taken place over the last few years, including countries other than China, such as Russia and India.

The world has never used a supra-sovereign (non-domestic) currency as the global reserve asset, and as such, there are some unknown factors which could swing valuations and volumes. The agreement between all countries and global institutions on a multilateral framework has been in negotiations since at least 2009, if not earlier. Many of the geopolitical and macroeconomic adjustments (such as the tension with Russia and the Swiss franc depeg) are symptomatic of the challenges presented by attempting to draw all countries into a multilateral framework.

It would be a mistake to conclude that any of these challenges will prevent the implementation of the multilateral framework. The negotiations are tightly woven around the need for all countries and institutions to integrate within a multilateral structure for the purpose of reducing and eliminating systemic imbalances.

The repatriation of gold is a necessary step in the transition plan as the deposit and storage of gold will change as the monetary architecture itself changes. The gold accumulation by China, which has left many speculating on the actual amounts and what China’s intent is with gold, is extremely foretelling of the multilateral negotiations which have taken place.

To consider that China has accumulated gold in a vacuum, without the support of the United States and the International Monetary Fund, would be in ignorance of the facts and plans which are now infolding.

China and the IMF are in discussions on including the RMB in the SDR basket composition. This was first widely discussed here on PoM, as was the probability of China announcing their actual gold reserves, while ending its managed peg to the USD, in the lead up to the SDR decision. The factual nature and analytical fortitude in these conclusions has given other analysts and economists the comfort to expand on the original explanations.

What we can consider from this point is the probability of China placing its full reserves, or percentage of its reserves, on deposit with the IMF, much like countries did with the Federal Reserve under Bretton Woods.

This would of course mean that the United States and other countries, such as Germany, who demanded gold repatriation, would also have to deposit gold on reserve with the IMF. This would explain some of the delays in the repatriation process, as the US is positioning itself to retain as much economic influence in the new system as possible. Handing back gold which will partially support the new multilateral framework would not achieve those ends.

China has made it very clear that they do not wish to replace the USD as the global reserve currency, nor do they desire to operate outside of the existing multilateral institutions, such as the IMF and the SDR. They also do not want to see their large investment in USD denominated assets be depreciated by any substantial amount.

Those indicators taken in conjunction with the accumulation of gold, and the pattern of transition from monetary system to monetary system, would support the conclusion that China, among other countries, will be placing large amounts of gold on deposit with the International Monetary Fund. As with Bretton Woods, the multilateral agreement, let’s call it the Lima Accord, will function around predetermined valuations, such as $35.00/oz gold USD peg with Bretton Woods.

Whatever valuation is established for gold, lower or higher than today’s real value, the multilateral framework will be further revealed throughout the summer months and into October, as the inclusion of the RMB into the SDR is secured and the actual gold reserves of China are announced.

There are so many moving pieces to this transition, but some semblance of pattern is beginning to take shape. Based on the demand of China to have their own domestic currency added to the SDR composition, and the agreed upon accumulation of gold by China, along with the “multilateralization” of gold exchanges, such as in London, and the rise of the yuan denominated SGE, can be interpreted as early indicators of the intent of Chinese authorities to place a large amount of gold on deposit with the IMF, in anticipation of the implementation of the SDR as the global reserve asset.

From a Chinese perspective, they have negotiated a means, through the SGE, BRICS institutions, and AIIB, of protecting their interests within the multilateral framework by preventing other interests from gaming the system and manipulating the valuation of currencies and gold after the initial valuations have been determined under the Lima Accord. - JC

13 Comments on “China Gold Deposits to the IMF”

  1. JC has addressed the collapse of the dollar many times before. I am sure that you can find something in the archives on his take on this.

    1. Good article, but that last paragraph/statement I have a hard time believing..that the US is oblivious to China's plans.. it could be, but I doubt it.

      1. And Neal the comments at the bottom of the article/ some of them bring up some really valid points and I did say just some of them. lol

  2. JC et al.,

    Here's an article that appeared in today's China Daily. What do you think, may this be a trial method for how to handle the larger issue of converting soveriegn debt?

    Saturday, May 16, 2015, 12:25

    PBOC allays fears over bond swap plan
    By Zheng Yangpeng

    PBOC allays fears over bond swap plan
    Pan Gongsheng, deputy governor of the PBOC

    The 1 trillion yuan ($161 billion) debt-for-bond swap plan will not involve massive liquidity injection into the financial market, and the central bank remains confident about its success, a top official said.
    Pan Gongsheng, deputy governor of the People's Bank of China, the central bank, on Friday confirmed the widely reported plan at a news conference, ending speculation on how the central bank would manage the unwieldy bond sale. The comment also put to rest fears that the PBOC may resort to massive liquidity injections through the Chinese form of quantitative easing.
    Earlier reports said the Ministry of Finance, the PBOC and the China Banking Regulatory Commission have jointly issued a landmark document, which established detailed measures for promoting bond issues by local governments. At the center of the plan is a requirement that banks have to accept a minimum amount of bond placements, as defined by their pro rata share of the issuing local government's total debt to be swapped.
    The Ministry of Finance in March announced a 1 trillion yuan debt-for-bonds swap plan that would cut local governments' interest payments and extend the maturity of their debt. But that plan hit a snag on April 23 when Jiangsu province had to delay a bond issue after failing to reach an agreement with lenders.
    The joint document has, however, changed all the dynamics. According to the National Audit Office on debt stocks piled up by local governments as of June 2013, bank loans accounted for 56.6 percent of local governments' borrowing, which means equal size of the new bonds will be absorbed privately between debtors and creditors instead of being issued in the open bond market.
    About 600 to 700 billion yuan of bonds will be absorbed via "private placement" with banks, while 300 to 400 billion yuan will be sold in the bond market, according to analysts at China International Capital Corp. They said that the move would help bond traders as it belies fears that the massive bond supply would soak up liquidity and drive up interest rates.
    "The direct swap plan hinges on adjustment in banks' accounts from loans to bonds. Thus it would not lead to huge capital infusions," Pan said. "Banks have a high acceptance of local government bonds. The plan is good for banks to improve their asset portfolio and possibly improve the liquidity of their assets," Pan said. As part of the document, the PBOC accepted the bonds banks purchased as eligible collateral for re-lending purposes or for repos, thereby improving the liquidity of these assets.
    However, Pan said that the inclusion of the bonds as collateral for repos and other liquidity operations does not necessarily mean that the PBOC will inject a corresponding amount of liquidity. It should not be regarded as quantitative easing.
    Both he and Vice-Finance Minister Shi Yaobin said they are confident that the 1 trillion yuan bonds will be sold before Aug 31, as the document stipulated.
    Also on Friday, the State Council urged banks to ensure funding to local governments' unfinished projects. Contracts signed before the end of 2014 should be honored, while banks should extend the maturity of the loans if local governments cannot repay them on time.

  3. This is an interesting article on China's military and the costs involved. It mentions the higher wages which increases costs and filters over into the military costs. It does not mention though what will happen after China depegs from the dollar. No one seems to address any of these issues accept JC. You hear very little from alternative media and nothing, absolutely nothing from mainstream, but of course that part is not surprising.

    http://thediplomat.com/2015/05/chinas-military-and-cost-disease/

  4. The US according to this article is not going down without a fight. But will this strategy work as this seems to be what they have always done in the past. I think that is why China is not included in the TPP and why the hard push of the TPP by the US. It looks as if they are going to try to use allies and economical means to slow down China. Will it work..I don't see it, but only time will tell.

    http://thediplomat.com/2015/05/balancing-china-and-the-realist-road-to-war/

  5. 'The IMF restructurings... you can go back and study them all... they're all deleveragings and they're all classic cases, and they're all pretty simple' - Ray Dalio speaking at Council on Foreign Relations

    http://ow.ly/Nq0nt

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