China's Plan To Subvert The Global Dollar Standard

Tyler Durden's picture

Authored by Alasdair Macleod via The Mises Institute,

If nothing else, the Chinese have a sense of history and destiny. They have had a glorious past, stretching back millennia, and once controlled most of the Asian heartland in the days of Genghis and Kublai Khan. But even then, China was essentially inward-looking, protecting her own cultural values. Trade with Europeans in the centuries following Marco Polo’s visit was mostly at the behest of European travelers, not the Chinese. She exported her art and culture to visitors, and did not import European values.

This was a mistake, implicitly recognized by China’s current leadership. This time, China has embraced Western thinking and technology to further her own progress. The development of the Shanghai Cooperation Organization in recent years is the platform for China in partnership with Russia to embrace the Asian continent through peaceful trade, improving the lives of all the citizens of the many nations who are and will become members. The SCO promises a revolution in the wealth and living standards of over 40% of the world’s population, and associated benefits for its supplier-nations on the other continents.

China’s approach is fundamentally different from that of America, which under President Trump appears to be envious of the success of non-Americans producing goods and services for the American consumer. Autarkic America has a GDP of $19 trillion. Eventually, China will have free trade agreements with the rest of the world, excluding for now the EU. On a purchasing power parity basis, this is a market with a GDP of about $70 trillion, out of a world total of about $125 trillion.

Already, China dominates world trade. Her own economy is already significantly larger than that of the US on the purchasing power parity (PPP) estimates. While being the largest consumer of raw materials, China also exports more finished goods by value than any other country. As the Asian powerhouse, she has lifted the economies of all the countries on the western side of the Pacific Ocean, which including her own between them have a GDP of $50 trillion. Her exports into Asia now exceed her exports to the US. Yet despite this dominance, most of China’s trade is conducted in US dollars, something China is bound to change, if she is to contain external economic risk and replace America as the dominant global empire. Both objectives can only be achieved by China replacing the dollar as a medium of exchange.

Why Gold Is Central to China’s Future Trade-Settlement Policy

China’s challenge is the yuan as a purely fiat currency will take decades to replace the dollar, possibly never. And that assumes that China follows more stable monetary policies than the US. This has not been the case since the Lehman crisis, with China’s M2 broad money quantity expanding rapidly, accounting for much of the world’s monetary growth in recent years. The rate of monetary expansion is criticized as a dangerous credit bubble by western analysts, who are quick to condone monetary expansion in their own developed nations, but turn into hard-core monetarist critics over China. No, China will never replace the dollar with her own currency without a golden guarantee.

Therefore, China needs to deploy gold to displace the dollar. This might be done in one of two ways, one encouraging markets to evolve away from dollars toward gold, or alternatively by the state forcing the pace.

China provides the facility to convert yuan into physical gold in the Shanghai market through the Shanghai Futures Exchange. This gives an exporter of raw materials to China a sound-money option instead of being paid only in yuan or dollars. It does not require China to use state-owned gold, the physical gold being sourced through the market. In time, liquidity in the yuan futures contracts should improve, and Shanghai is already the largest physical gold market. Note that only last month it was announced that Russia’s central bank has opened an office in Beijing, and is tasked with resolving the technical aspects of gold deliveries from Russia into China. The importance of the Shanghai Gold Exchange will increase further through this link to Moscow. Using the Chinese market for physical gold delivery over time should impart some stability to the yuan relative to the dollar, particularly if American banks trading on Comex continue to discourage taking delivery of physical bullion.

That might take for ever. Alternatively, China could announce plans to make her currency convertible into gold at a fixed rate, but it would have to be at a far higher exchange rate than the current CNY8,700 to the ounce. If this course is followed, US Treasuries are bound to be displaced as the zero-risk bond standard, potentially creating chaos in western financial markets. China would also need to reveal her true holdings of gold bullion, transferring them into the currency reserves account, to give the foreign exchanges confidence over the scale of gold backing for the yuan.

So far, China’s policy has been to pursue the least disruptive route, preferring not to dislocate global trade, partly because she needs to co-exist with the rest of the world politically, and partly because it would affect her own trade adversely. It has also been very convenient to be able to direct the Chinese economy through the expansion of bank credit. The least disruptive route is still the default assumption.

China will also want to reduce her reserve exposure to the dollar and US Treasuries in an orderly fashion. The pace of selling, the degree to which dollar reserves are to be reduced, and the rate of accumulation of industrial materials and energy all determine the length of time to complete a currency reset. This course has been expected by informed observers to lead to a gradual decline in the use of the dollar as its role in global trade diminishes. The alternative, with China announcing its true gold reserves and a rate of exchange with its own currency was always viewed as an extreme option, only to be resorted to upon severe provocation.

North Korea might become the trigger for that event, but so would a domestic financial crisis in America, insofar as it might be expected to affect America’s foreign policy. Remember that the Chinese believe America periodically engineers a foreign crisis to fund its own economy, by encouraging dollars to buy US Treasuries, in preference to more risky employment. For this reason, China will be watching the US economy closely for signs that might impact on the dollar’s value.

After a long period of subdued growth, there are now signs that the US economy is suffering from overall debt fatigue. Bank lending is stalling, as the chart below of US M2 minus M1 money supply shows.

The yield on the long bond has fallen from 3.2% to as low as 2.9%, indicating a possible recession is on the cards, and the Atlanta Fed has also revised its expectations for economic growth sharply downward.

Shortly, unless some miracle occurs, the US Government begins to shut down, the debt limit having been reached with no sign of an agreement to increase it. At the same time, America is escalating tensions over North Korea. Beijing is convinced that America’s belligerency is driven by financial factors, and it is possible that Trump is stoking up American patriotism to force Congress to increase the debt limit. In short, China probably believes America has become desperate.

Imagine how China feels about this. Will China bring forward an attack on the dollar’s status as a defensive warning shot? Will it be forced to abandon its softly-softly approach to easing the world away from dollar-dependency? Is it prepared to escalate the financial war with America, to the point of America’s financial immolation?

The answers to these questions are likely to be revealed in the coming months, possibly in only a matter of weeks, if North Korea heats up. But if China decides to revalue gold, western capital markets will be wholly unprepared for the fall-out. China itself will be affected, as will all other nations that trade with the US or trade with countries that trade with the US. The advanced welfare-driven nations dependent on capital markets are at risk. The great financial crisis of nine years ago will be a light rehearsal compared with what could follow.

The irony is that the countries isolated from the dollar, especially Russia and Iran, will come out best. Iran will be significantly stronger relative to Saudi Arabia, with important consequences for the power-play in the Middle East. Russia will also have an interest in pushing China for this action, partly because it should tip the balance in Syria in Russia’s favor, and partly because the destruction of US hegemony will free Western Europe from being tied to America’s apron strings.

This is the final prize for the two leading nations of the Shanghai Cooperation Organization: a free trade area which will eventually include the whole Eurasian Continent, with the rest of the world acting as its feedstock. It has always been the ultimate logic behind the Russian-Chinese partnership. Despite all its military power, America will be isolated, unless, like Britain ditching her colonies in the 1960s, America accepts she no longer controls global commerce.

That is hard to imagine. Meanwhile, uppermost in Russia’s mind will be the continuing problem of oil prices tied to the dollar. There is some circumstantial evidence that America used the oil weapon to attack Russia by encouraging the collapse in oil prices in 2014. True or not, Russia will not want to be exposed to the continuing risks of her major export commodity being priced in dollars. She will almost certainly prefer to see oil priced in gold, or a currency linked with gold. Our next chart, which compares oil priced in dollars with oil priced in gold, illustrates the financial stability this can be expected to give Russia and the other Asian oil exporters as well, relative to the historic price volatility in dollars.

Before the failure of the gold pool in the late sixties, and the subsequent abandonment of the dollar-gold standard in 1971, oil, in common with all other commodities, was effectively priced in gold, the dollar being merely the settlement medium. Since 1971, the oil price measured in gold has varied in a 350% range, while in dollars the range has been many magnitudes greater. If the dollar is to be undermined, the dollar-oil price may rise, but the dollar’s purchasing power eliminates any benefit. Russia will almost certainly want to revert to the pre-1971 regime, of oil priced in gold, allowing her to accumulate monetary reserves that retain their value.

So, we can begin to understand the importance of Sergey Glazyev sharing China’s geo-strategic view. It confirms, that sufficiently provoked, the Shanghai Cooperation Organization’s plan to operate without the US dollar, might have to be brought forward. The SCO’s economic stability cannot be guaranteed by replacing one fiat currency in its death throes with another. Some form of gold convertibility will be essential, so those plans will be brought forward as well.

Perhaps China and Russia no longer have the luxury of time. America’s increased military belligerence in Trump’s first hundred days might force their hand. Perhaps America, knowing her demise is becoming increasingly inevitable, has some dramatic plan under wraps to seize the financial initiative, as dramatic perhaps as the Nixon shock, when America abandoned the post-war gold standard. The instability brought into the geopolitical equation by the Trump presidency, and the early signs the US economy is grinding to a halt under the sheer weight of consumer and government debt, are increasingly likely to prompt China and Russia into firm financial action, if only to protect themselves in an unstable financial and monetary environment.

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Troy Ounce's picture


OK guys. Read the Kyle Bass post and the wait might be over sooner than later.

Ghordius's picture

do you mean the Kyle Bass post "Japan is a bug in search of a windshield" years ago?

he tried to find ways to "short Japan", found only some indirect ones, and later had to admit that he failed

now, a Nationalist in Japan would call him a "foreign evil speculator", a symbol for "hot international money" looking for some kind of "exploitation", be it in returns on things going well or... returns on things crashing

a Nationalist in China... the same. now the really funny thing about all this is that those Nationalists... if you start to talk about "Globalists", they would not think about let's say those Americans that engage in foreign relation policies like the US neo-cons or the US neo-liberals. they would think about Kyle Bass and Soros first

whereas for a portion of the ZH commentariat, Soros is evil while Bass is a kind of champion

now, Chinese Nationalists keep an eye on both. and they spend a lot of time devising ways to foil those attempts, and learn the lessons from how the Japanese Nationalists are doing that, how they "play the game"

see my post below on how bi-polar thinking makes people blind to reality

apadictionary's picture

just waiting for communist china to disintegrate. common cia do it already

PrayingMantis's picture


... >>> "Why Gold Is Central to China’s Future Trade-Settlement Policy"

... it's the new golden rule ... (((he))) who holds the gold, rules ...


Common_Law's picture

An interesting hobby I've picked up lately is collecting old 60's 70's 80's computer circuit boards with the hope of eventually making a wall covering/room divider and maybe backlighting some of the translucent ones like lampshades. I just started doing it because I think they look cool, but it's also an investment since they have high gold/silver content and there's always a market for scraping them. 

So there you have it, invest in wallpaper...

halcyon's picture

Most pundits do NOT get it. Replacing a world de facto reserve currency is a decades long, slow, drawn-out affair. Esp. today when it means you have to have an alternative payments clearing network, satellite/comms network that supports that and military that protects those.

Look, I would love to see the corrupt petro-dollar-crap replaced by something more real and trustworth like 45 years ago (calling Nixon), but my hope does not make it so.

Don't hold your breath on this one, but plan for the future..


BandGap's picture

The replacement  of the reserve currency cannot be decoupled from the debt. China is in deep shit there, and deeper than the US. They look to be trying to balance this against gold reserves.

Currently only one major power has no debt - Russia. Russia also has huge gold reserves. Iran is also debt free but is a mid level player. How that works out for them remains to be seen.

Europe, is fucked and relegated to looking for spare change in the couch cushions. Japan is also a non-entity. They can't even get people to enjoy screwing one another.

Interesting times.

I Feel a little Qeasy's picture

Bullshit. He who has the gold etc. Europe is only fucked because of US dollar vassalage. This will change dramatically when the dollar becomes toast, which will be decided when it suits the deciders. Europe has the best educated, hardest working, most motivated population on the planet. Also has the largest economy and the brightest future when you realise it is one end of the new 'silk route', European technology---eastern resources and labour. You are nowhere and nothing, useless US terrorist leaches. Interesting times indeed.

Aristofani's picture

kyle bass is that a fish? They tend to smell.

Fake Trump's picture

It is a matter of time China will reshuffle the cards making them great and powerful as the No.1. The yuan will become the reserve currency replacing the US dollar. When that happens America will be in big trouble. 

jeff montanye's picture

and in the days of the khans the mongols controlled a good deal more than the heartland of asia: more like from the sea of japan to poland and hungary.  one can still see the epicanthic (formerly "mongolian") fold on natives in eastern europe which dates from the invasions of the khans.

kellys_eye's picture

The US has strategically placed anti-ballistic missile systems in the Baltic and throughout Europe.  They are now using the NK 'worry' to do the same on the Korean peninsular (bordering China).  So the two threats to the US hegemony and petrodollar are now surrounded by 'defensive' missile systems.  Meanwhile the US performs practise launches of ICBM under the cover of demonstrating to short-round that he should toe the line - despite the fact that KJU is a meaningless wart on the backside of the world.

I wonder what other reason there could be for such tactical 'defensive' measures??????

yogibear's picture

The Chinese are a very patient culture, unlike the west. China realizes the best way to destroy the US is economically, Provide enough rope(debt and dependency)  for the US to hang itself.

Hillarys Server's picture

America will not go quietly into the night.

I sense more belligerence and posturing and maybe a "whoops" accidental war.

07564111's picture

Yep. Many have said the same before.

The parasite attacking Americans will see it all destroyed before it gives up and it's all but run out of available hosts.

Freddie's picture

Silk Road bitches and Gazprom's mind boggling pipelines that cover all of Eurasia. The Silk Road rail lines and gazprom pipelines make the US Navy less of an issue.

The USSA Inc. is so corrupt with Kushner-Soros-Clintons-Bushes-Wolfowitz and the rest of the scum.  Amerrica's supoosed best and brighest aka white males are easily stupidfied into cheeriing on their Trayvon NCAA, NFL, NBA rapists and can be easily duped into cheering on yet another ziocon war. 

Jared + Ivanka = New Clinton Crime Foundation

Sonny Brakes's picture

How is it China's fault if the USA and its so-called American entrepreneurial class along with the help of their bought and paid for politicians decided to commit treason?

07564111's picture

It's always someone else that is at fault.

jeff montanye's picture

for instance bashar assad, saddam hussein, osama bin laden and the ayatollah khomeini

their faults.

Ghordius's picture

note in this article what I would tend to call an "American Bi-Polar Worldview", i.e. always two sides only

yes, China is, methodically and one piece after the other, setting up a whole network of alliances, trade treaties and so forth

a good example for that is one country that used to support logistically the efforts in Afghanistan, and then stopped, and is now more or less a "partial client" of China: Pakistan

but I would be wildly astonished if the world would progress from one hegemon to the next hegemon. never happened before, and very difficult to achieve in short time. the "world standard" has always been multi-polarity broken by spells of bi-polarity and one super-exceptional spell of uni-polarity

as a reminder, Obama and even more Hillary Clinton wanted to counter this by "spanning two huge free trade areas", i.e. one TTIP to europe (which, frankly, was really too much to ask) and one TPP to Asia... all Asia excluding China

meh. how exactly does that EU and that EUR look like a bad idea, in a world where the US and China are battling for dominance while forgetting that several other, substantial sides from India to Brazil to Pakistan to Iran to Saudi Arabia to so many more are only clients if they perceive to be in their full national interests?

again, Pakistan is an excellent example. it is a very difficult client for China. it costs them a lot, and it has plenty of reasons to switch even that partial clientship very quickly, all depending from it's relationship to India

America would need fresh thinking, in this new age. starting with thinking "more multi-polar", and stop throwing money at problems, an approach that delivers fantastic results... which then decrease in effectiveness

but America is engaged in an own "two sides only" thinking for internal, domestic matters, and increasingly polarizing, too

it's a way of thinking that might help in winning a war, but not for anything else, and there is literally no fresh war in sight that does not look completely daft

Washington can forget that approach of engaging every other country in a direct way, disregarding the complexities of that country with the others. it does not work anymore, it was itself a sign of uni-polarity. simple does not trump complex, not in the long run

an excellent sign of that was Obama declaring the same rebel group a friend to be supported in one country and an enemy to be fighted against in a different country, and never mind that it was an artificial border in the desert that made the whole difference

either the US "fixes" itself, or it "fixes" it's approach to the rest of the world. "none of that" spells decline and nothing else

"fixing" the US would entail a lot of education. "fixing" it's foreign policy would entail a more reasonable approach by neo-cons and neo-liberals. in both cases, it would entail abandoning that "two ways only, with us or against us" thinking

kellys_eye's picture

....boiled down to - gold versus fiat.

Ghordius's picture

only if the Chinese national leadership thinks that it is in the Chinese national interest (which, btw, in China it means the interests of the one and only party that they have)

at the moment, that Chinese national interests lies in "offering" gold as an option, a threat

that very option was hedged by the PBoC buying several thousend billions of US Treasuries

so no, your very "it's two sides only, gold vs fiat" is actually the very thing I am ranting against. it has some truth in it, but it is way too simple, way too bi-polar

examples from monetary history abound: not all countries engaged in "gold-backed", in the past. or see the battle between gold and silver-backed, in parts of history, leading to a three-sided battle between fiat, gold and silver

so no, it is at least gold vs fiat vs oil-backed vs export-backed, what we are witnessing at the moment, in a flux of options and threats and possibilities

all the above is not a reason to refrain from having some gold stashed away, note. I highly reccomend that. I started in 1971, though. if you think that is the way to quick riches... well, you might get lucky or not

jeff montanye's picture

never happened before?

british control to u.s. control seemed pretty seamless to the colonized world, imo.

Ghordius's picture

British control was facing French, Japanese, German, Russian and US control, wasn't it?

specifically note the "Great Game" with Russia in Central Asia. or note the British-Japanese alliance when the UK started to retrench back to Singapore. or the "Railroad Game" when Germany and France started to build a continuos railroad from europe to the ME

that "seamless" was roughly one third of the globe, at the height of the British Empire. but it was nevertheless a multi-polar affair, even after the US sunk the Spanish war fleet, in a time when the US was counted as "Anglo-Phobic" in London

Winston Churchill's picture

More a changing of the palace guard.Nominally speaking the same language, with a shared heritage.

None of that is in play this time,so add xenophobia into the mix.

JohnGaltUk's picture

"it's a way of thinking that might help in winning a war"

The last war they won was WWII, the rest are continuing disasters that is sapping their economic strength which eventually will end in their own collapse.

They fell for the same trick Britain did, after two world wars Britain went from wealthiest nation to broke.

If USA citizens had only read Washingtons farewell address! He said, NO foreign entanglements.

Ghordius's picture

another sign of that "Two Ways Only, and Both Extreme"

either Full American Nationalism of the Most Pacifist and Isolationist sort or Full American Inter-Nationalism of the Most Warmongering and Intruding sort

yes, you are right: what breaks Nation States and Empires is war. the most costly of all national endeavors, and the most costly of all imperial endeavours

but there is a virtue in moderation, the true queen of all virtues, without which all the other virtues aren't such

your recipy is extreme. even if I wanted, I could not trace a path to it that would work. do you have one? one that acknowledges the realities and complexities involved?

any realistic path is gradual. step by step

PrivetHedge's picture

The US didn't win WWII, their supplies of goods helped the allies to win it.

The Us happened to be on the winning side, made a fortune from arms sales and inherited an empire, which they are now demonstrating to the world is no better than the one they supposedly beat in Berlin.

Iwanttoknow's picture

Ghordius, no disrespect but you know shit about china and pakistan.

Fireman's picture

Why fret about China when they are the ones financing our "stuff" and serial judaic wars?



Who owns USSA?

The who has gold lie!


jobs gone!

webmatex's picture

The chinese CP don't want the hassle of reserve currency.

But gold will guarantee that in the future change over all chinese who own gold (most) will become much more wealthy citizens at a time their Yuan will also strenghten in value.

This will not be the case for most people i the West.

Pitty we don't have gold loving communists running the shop?


HenryHall's picture

Conversion to gold based trading can be done gradually and softly. And without risk.  By a simple expedient of granting a healthy discount (15%?) on the dollar price for prepayment in physical precious metal. Discount voluntary - pay in physical metal or pay a higher price using credit for fiat money.. 


Dilluminati's picture

Your 15% is correcct.. laughing... absurd


JohnGaltUk's picture

China does not have to do anything, the USA is doing fine by its self to destroy the dollar standard.

Just like all that have gone before. When any society starts to debase its own money you know the end is near.

Ayn Rand made that perfectly clear on the paper she wrote; The Meaning Of Money. Its text book.



There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Ludwig von Mises

gunzeon's picture

obviously, the lower the price of gold, the more China is squirrelling away, so as to consolidate their hedge.

gunzeon's picture

also, as was said on John Pilger's new docco;

 - in the US, Big Business runs the Government

 - here in China, the Government runs Big Business

c2nnib2l's picture

Well they're not gathering all this gold for nothing same Russia... Goood ! 

gunzeon's picture

... and so, one must get the feeling that the gold price is bottomed; it cannot be wise for tptb stateside to crush it else China gobbles it all up.

gunzeon's picture

Pilger's docco also said - not exactly - America is pissed because China is beating them at their own game - Capitalism !

saldulilem's picture

Currency manipulator! Sanctions!

Aristofani's picture

Fuck the yankee $, it with wall street have been fucking the world long enough!

BigFatUglyBubble's picture

THAAD in SK is about this

DoolieDoink's picture

You can help too.

STOP buying American products NOW

Your contribution will be appreciated


any_mouse's picture

Wait. I thought the USA(((FED))) was subverting the Global Dollar all by itself.

Will China's efforts cause some sort of quantum reverse effect where the Petrodollar will be strengthened by the double negative?

Buy Gold. Then figure out how you are going to physically defend your stash against all enemies, foreign and domestic.

Besides Fukashima is shaping the future of Humanity on Earth regardless of reserve currency status.

Seems to me the Global Warming crowd needs to stop looking at Carbon in the air and get concerned about radioactive isotopes in the oceans and the food chain. But then AGW was never really about temperatures, was it.

Dilluminati's picture

Just about when you think that you cannot find a more absurd rationale for PM in the beginning of another round of debt deflation, recession, and stagflation where there simply isn't the bid to support another bubble in PM you read an article such as this.  I'm looking at silver this morning and the mapple at JM Bullion and see a .11% delta between spot and delivery minus shipping.  18.47 for 500+ But lets look at a reasonable bid 19.37 at 15% with shipping.  

So for the sake of clarity lets say that there was 5% inflation then the silver would buy par in 6 years.  Assuming it was bought and sold back to Kitco/jm etc.

I keep reading these articles of PM coming back as currency and just shake my head.

Yes I know the book the road to serfdom and know what debt deflation is and how that damages an economy, but the idea that in beyond systemic collapse where bullets would be worth their weight in PM do I think that the bubble of lore will happen anytime soon.  And that bubble in PM happened because there was enough easy credit in the housing market to fuel bubbles in horses, cars, yachts, and allot of other items as well.

So I went and looked last evening becasue silver was down, and guess what? At that delta I'm not a buyer.  And nobody with 1/2 a brain and who actually stacks would do so also.  And articles like the one above, which would suggest that China would go PM with a country of a billion citizens is even rationally believable, it's economic fiction beyond even the fed who has no credibility.

Beyond a stack for prepping it's not relevant any time soon, you'd get a better ROI buying bullets. TMJ lead > PM in the scenarios some fools cook up.  I have been posting here awhile saying PM is going to go down not up in the next correction.  It is no longer a rotational market when you can park in bitcoin and "hopefully" get your dollars back.. but PM is a fixed market and has it's own warts and the delta in bid ask is just part of it.  Just saying.. It's ugly knowing that you're paying that much premium for that asset.  It's down but at a 15% premium?  Loose up to 30% in the ask/bid?  

So then you scream pooled accounts and call that fixed.   Beyond a few hundred dollars a year in jewlery and some silver rounds, nobody with 1/2 an investing brain believes these articles.


Kayman's picture

Precisely. You can hold physical gold, but it will never trade physically.

 (They will ) convert yuan into physical gold in the Shanghai market through the Shanghai Futures Exchange. 

Paper gold is just another scam.

NMA's picture

The solution - same as was done in the case of Iraq or Libya..... another good old war..... ever wonder why suddenly North Korea is suddenly presented as such a major threat to the west by the media, despite them being as loony as ever!?!? 

roadhazard's picture

China is going to do nothing. They have all they can do not to implode themselves.