Wednesday, May 27, 2009
China and American Gold
"In China, many people refer to the dollar as mei jin, or 'American gold.' Government officials, businessmen and people on the street all use the term. ... Chinese impressions of the American dollar as the gold standard were so deeply entrenched that they survived President Richard Nixon's 1971 delinking of gold and the greenback. Around 30 years ago, China's foreign exchange reserves were as little as $167 million. ... After a long pause, Deng [Xioping] went on to tell the unconvinced crowd: 'Comrades, just imagine! With 10 billion American gold, how much China can do!' ... China's foreign exchange reserves are now close to $2 trillion, and around $1.5 trillion of it is invested in dollar assets. With the global financial crisis, the attention of the world often focuses on this huge pile of American dollars in Chinese hands. ... No one knows for sure when the tide started to turn, or the exact moment when American gold started its slow but seemingly irreversible loss of luster. But now many shops in China no longer accept dollar-based credit cards issued by foreign banks (the customer pays in dollars, but the shopkeeper is paid in renmibi) and foreigners cannot convert American dollars beyond a given quota. ... The [US] may want to consider offering inflation-protection measures for China's existing investment in America and offer additional security or collateral for its continued investments", Victor Zhikai Gao at the NYT, 14 May 2009, link: http://www.nytimes.com/2009/05/14/opinion/14Gao.html.
This reminds me of Europe in the late 1960s when US dollars were not an acceptable medium of exchange. Eventually the Chinese will pull the plug on the dollar. That Chinese viewed the dollar favorably in 1971 is no surprise. In 1937-1949 China underwent a hyperinflation, Shanghai's price level rose from 1 in May 1937 to 151.7 trillion in April 1949. 1971, 22 years later, had most Chinese adults remembering the hyperinflation. By 2009 most 1949 adults are dead. Today's Chinese adults do not fear a Chinese hyperinflation.