PBOC banking on collapse of the Dollar: What about Bitcoin?

china pbocChina has a very long history; it has seen times of economic boom and economic recession come and go, it is a nation that has learned the importance of thinking in the long term. Where America and Europe are like blue-collar workers planning on blowing their wages on a Friday night whereas China is more like their wealthy uncle planning on investing his pension surplus for the benefit of his children and grandchildren.

Maybe we should pay more attention to what China is doing.

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In April 2009 the Peoples Bank of China (PBOC) surprised the world by announcing that it was holding 1,054 tons of gold; it is now estimated that they are currently holding at least 5,000 tons of gold. Some examinations of gold import data from government agencies in Hong Kong, and reported results from Chinese gold miners,  point to a holding that is possibly close to 6,000 tons. This leads us to ask two questions:

(1) Where did all the gold come from? and (2) If economists  are right and gold is indeed tarnished commodity, why are the Chinese hoarding it?

Where did all the gold come from?

Well, China is the world's largest producer of gold, but he rest has to come from imports and that causes a problem. The world simply doesn’t produce enough gold to account for China’s  global demand. The only answer is that the Federal Reserve has been selling them quite a bit of the U.S. gold reserves. This is just an opinion though and without an external audit, we'll probably never be sure.

Are the Chinese hoarding gold?

The Chinese are choosing to hoard gold because they are a very smart people and have thousands of years of experience. They have millennia of planning in their exceedingly long history; whereas Europe and America have a couple hundred years, the last 25 of which have clearly established us to be financial incompetents. The PBOC are well aware that the U.S. dollar is a potential bonfire waiting on a spark. The PBOC owns some $3 trillion worth of U.S. Treasury paper, but it would be dangerous to rely on the concept of Mutually Assured Destruction (China won't undermine America because  that would undermine their own financial self-interest) because when the finally goes belly up, and it most assuredly will, gold prices will be forced up dramatically. The tons of gold China holds in reserve will soar, and this will serve to offset the losses on US Treasury paper. Not only is China importing massive quantities of gold through Hong Kong — nearly 1,200 tons in 2013, Beijing is now the new import hub for gold purchases made abroad. The PBOC has created the perfect hedge to protect China's economy against the future shock that it knows is certain.

How does this affect Bitcoin?

The next logical question that must be asked is "how does this affect Bitcoin?" Well, clearly the PBOC has come down hard against virtual currencies and why would they choose to do this? Now the PBOC is huge, it holds and controls reserves of $3.2 Trillion Dollars; it controls and regulates monetary policy, as well as all financial institutions in mainland China. I have previously written about Chinese money manipulation. Bitcoin is a currency that is, by definition, independent of all states and this does not suit China. Should there be a collapse of the dollar there is a possibility that Chinese workers could use the virtual currency to purchase imported goods, the bitcoins used for these transactions would have been purchased using Chinese currency, and that would affect China's economic wealth by removing money from circulation. But it must be remembered that Bitcoin is also a hedge. In the advent of another economic collapse people would move into Bitcoin as a medium of investment. It may not suit the PBOC as well as gold does, but it may suit the savvy investor a whole lot better.

Featured image by Shutterstock.

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About the author

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PJ Delaney

Masters in Public Administration, Bachelors in Mgt.,
I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.

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