Recent media reports suggest that Beijing is considering backing the
yuan with gold. This decision, if taken, will likely affect China's
economy and may trigger a new wave of the global economic crisis. For
Russia, however, such a scenario may have its benefits.
According to media reports of early July, the People's Bank
of China is mulling the possibility of phasing out the dollar as the
reference currency for the yuan exchange rate, and to start using gold
as the reference point.
The reports have not been confirmed officially, but analysts are
warning that the step, if taken, will weaken the yuan and destabilise
China's already troubled economy, ultimately provoking a new bout of the
economic crisis worldwide.
Beijing's possible move to back the yuan with gold would not be meant
as a strategic measure to strengthen the national currency and increase
its attractiveness as an investment medium. Rather, it would be a
flaunt aimed at demonstrating to the world (and to the USA in
particular) that China is capable of taking the risks associated with a
departure from the dollar standard. Experts warn however that, apart
from benefiting no-one, such a decision may actually have catastrophic
consequences.
Separating the yuan exchange rate from the US dollar may further
weaken the American currency in the long run; in addition, China's
monetary policy would become very much restricted, believes Evgeny
Nadorshin, chief economist at AFK Sistema.
"The yuan will start fluctuating severely against the dollar and
other major reserve currencies. This will affect the Chinese economy,
which currently has serious problems as it is: the export revenues are
falling, and the statistics for freight traffic and electricity
consumption indicate a significant slowdown in business activity," says Aleksandr Golovtsov, head of the research department at UralSib Asset Management.
Given the current economic recession in China, backing the yuan with
gold may further worsen the situation. In essence, China is running the
risk of launching a new wave of the global economic crisis, experts
concur.
Possible effect on Russia
When it comes to discussing possible consequences for Russia however,
opinions differ. Aleksandr Osin, chief economist at Finam Management,
actually believes Moscow could benefit from a gold-backed yuan because
this would help Russia in its economic relations with China.
On the other hand, the greatest danger to Russia being highlighted by
most experts would be an increase in competition from Chinese
commodities, which will be offered more aggressively in the export
market due to the shrinking of domestic demand. "China's demand for
Russian raw materials, in particular for crude oil, metals and
fertilisers, will be growing at a slower pace [than is currently the
case]," Golovtsov notes.
"What is not clear in all this sttory is why China should back the yuan with gold in the first place," muses Natalia Orlova, chief economist at Alfa Bank. "Beijing
could simply divorce its currency's exchange rate from the dollar
without locking itself into dependence on the price of gold and the
amount of that metal in the country."
Russian financial experts are cautious about the possibility of the
yuan becoming a popular investment medium; they are not prepared to
recommend keeping one's savings in yuans just yet. "For yuan to
become an investment medium there must be fewer restrictions on currency
circulation and a greater freedom of foreign operations with that
currency," Nadorshin points out.
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