Market Insights, The US Dollar

Is China Planning to Attack the Dollar With a Gold-Backed Yuan?

Gold Alliance disclaimer
China has launched a digital currency and is allowing more gold to be imported, which could be a sign China is going towards a gold-backed yuan to take over from the US dollar.

Last updated: 7/26/2022

In 2018, China launched a oil futures contract that was priced in yuan but could be converted to gold. It means that oil producers could sell oil to China and immediately convert the yuan they got into gold, providing them better value than the paper yuan and even the dollar.

The move raised concerns that this so-called “petroyuan” would be the first of a series of blows China is planning to impact the world’s reserve currency, our dollar.

And those concerns seem to be valid. In the fourth quarter of 2020, central banks worldwide are holding less dollars as the dollar’s share of global exchange reserves dropped to 59%, according to the IMF — its lowest number since 1995.

The US dollar's share of global exchange reserves is at its lowest point since 1995.

Now, China is launching an “uppercut” aimed at dethroning the dollar. Beijing has been experimenting with its own digital currency, including large-scale trials where consumers could use this currency for payments.

They’ve taken the lead in the ring, and just recently they became the first major economy to unveil a central bank digital currency. But China knows it will take a series of blows to take down a reigning champion, so they have not stopped there.

How is China going after the global gold bullion market?

China’s Gold Reserves in Tons

A chart showing that China has steadily been increasing its gold reserves and is now stepping up its game by allowing even more gold into China, perhaps part of its plan towards a gold-backed yuan?

Enter the gold-backed yuan

The loosening restrictions on gold imports could be a sign that China may be moving towards a gold-backed yuan to escape a coming dollar collapse and to reinforce their own currency.

Think about the security that a gold-backed currency would give to central bankers around the world. If I am a central banker, then not only can I hold the yuan as a reserve currency for trading purposes, but knowing it’s backed by gold gives me the peace of mind it will not be devalued… well, at least not at first.

In theory, China could implode the value of the dollar if it monetizes its gold reserves via its own gold-backed currency. While this could look like a quick knockout victory for China — which some writers claim could come really soon — the situation is more complex than that: it’s not in China’s immediate interest to destroy the dollar since China would pay a heavy price for it.

China owns roughly $3.4 trillion, including $1.5 trillion in US Treasuries, corporate debt, and short-term debt in the US. Beijing is actively using these funds in loan finance to its commodity suppliers, including its Belt and Road Initiative (China’s global infrastructure development strategy to secure its economic future by connecting Eurasia, Africa, and Oceania to generate trade).

If China, in the near term, goes after its aspirations to make the yuan the world’s reserve currency by destroying the dollar, China would lose its significant influence around the world because only a fraction of its loan financing is held in yuan. In this scenario, the US would gain a geopolitical advantage over China from a dollar crash, and that’s the last thing China wants.

In fact, if the dollar starts sliding in foreign exchanges, China might even call on the Fed to strengthen the dollar because a weak dollar makes US imports from China more expensive, which would harm China’s economy. The Fed is unlikely to budge, however, since it’s addicted to its inflationary policies of money printing and low interest rates.

If the Fed’s money-printing machine creates a currency-devaluation crisis with severe consequences for the dollar and other fiat currencies, then China may have the incentive to attempt to crush the dollar as a way to protect the yuan.

How does the tie between the dollar and yaun fit in?

Will this be the end of an era for the dollar?

A graph showing the World reserve currencies don't keep their status forever, and perhaps China's gold backed yuan plan is about to take over from the US dollar.

The dollar is already under threat — from our own central bank

Let’s return for a minute to the Fed’s inflationary policies mentioned above as they can lead us to the scenario of the dollar being dethroned.

In the past year, the Fed has printed around $4 trillion dollars. That’s roughly one-fifth of all the dollars ever created. Combine that with near-zero interest rates and we have a recipe for inflation and currency destruction.

Short and simple: Our own central bank is eroding the value of our own currency. And by doing so, it’s also eroding the confidence in the dollar and empowering our biggest strategic foe.

The lesson here is to not be afraid but to prepare. We as a nation should not worry whether or not China is setting up the yuan to take over the dollar’s throne, but we certainly don’t need to set the stage for them, which is sadly what is currently happening.

You as an individual cannot dictate our administration’s or the Fed’s policies, but it’s your duty to yourself and your family to prepare your investments to survive the potential erosion of the dollar.

If you do so with diversification into gold, your investments will grow even in the most adverse conditions for the dollar as the price of gold will skyrocket. If you don’t, you’ll join the many people who will have to face the consequences of not being protected during a major currency crisis.