China’s Bullion Reserves – Gold, Silver and Silk
Modern economic research estimates that through most of last 1000 years, China and India have accounted for about 50% of the world economy. 20th century was different for both. While Indian gold based systems are better known, Chinese gold story is very different.
1. China & Neighbours – Gold Producers
India was always an importer of gold. Domestic gold production in India’s core geography has historically been negligible – or low.
China, on the other is different. Mongolia and China have been significant gold producers in history. Estimated gold reserves from current ore mining in China exceed 600 tons – and exploration efforts are expected to increase this to 3000-3500 tons. China is the world’s 4th largest producer of gold – ahead of USA and behind Australia, and expected to overtake South Africa soon.
Currently, illegal mining in China is big time activity and is indicted for supporting poaching!. Chinese were exporters of gold and silks.
2. Chinese – Great believers in silver
Chinese common coin was a silver coin – the tael (which came from the Malay word tahil; which came from Indian word tol; meaning ‘measure’). There were 2 taels – one was commercially pure silver ingot of one Chinese ounce called a liang. The other was a kuping tael – which was coin. Bulk silver was used as currency and called sycee. There were many other taels like Tsaoping, Peking, Tientsin, Hankow, Canton. Chinese also use silver jewellery – against gold preferred by Indian women
Jiaozi - circulated in Sichuan in the Chunhua period of Emperor Taizong of Song Dynasty
Chinese rulers circulated paper money for longer (from 6th century onwards) and greater area than any country in the world. The first paper currency jiaozi was issued in 6th century – which collapsed very soon. The Song dynasty re-introduced paper currency in 9th century due to copper shortage. Probably, some Jewish merchants were also involved in the jiaozi manufacture.
Kublai Khan’s (a descendant of Genghis Khan) paper money management meant that all Chinese had to deposit all gold (or be prepared to die) with the Khan’s treasury and they got a currency note which was trade-able. This ‘system’ received wide publicity in Europe (thanks to Marco Polo). 600 years later, Roosevelt did the same with the Americans – and collected 8000 tons of gold.
Western consumers bought tea, silks and other Chinese commodities for which they paid in silver. The Chinese did not need much of Western goods – like India. To correct this negative balance of trade, Europeans promoted opium in China. When Chinese resisted the Opium trade, wars followed.
In early 19th century AD, Opium imports into China by British, French, American, Dutch, Spanish traders, sourced from India led to an outflow of silver from China – and a currency crisis. The ruling Qing state went into a downward spiral– culminating in the Chinese Civil War and rise of Communism. The Kuomintang (supported by Chinese underworld, The Green Gang, The Red Gang and The Blue Gang) was pitted against the Mao Ze Dong’s Communist Party – and both were armed and supported by Western powers.
Opium for China was produced by indebted Indian farmers and a few Parsi traders set up their offices in Hong Kong. However, the Parsi role diminished after the advent of steamships, their big losses during the Opium Wars and the rise of the cotton trade. Other Indian traders, possibly restricted by ‘shubh labh’ compunctions played a lesser role (compared to the European traders) in this Opium trade.
Major opium trading companies like Jardine Matheson, David Sasoon & Company and sundry traders set up The Hong Kong & Shanghai Banking Corporation for facilitating this misery. The Chinese Opium problem was finally solved by several draconian measures during Communist rule.
5. Wars In China
When Chinese resisted the Opium flood, Western traders resorted to war. The Japanese emboldened by new found wealth and military technology, joined Western powers. The Sino Japanese Wars, The Opium Wars with Europeans and The Boxer Uprising before WW1 imposed large war reparations on the Chinese. The Civil War in China between the world wars destroyed Chinese commerce systems. The Cultural Revolution has left the Chinese commercially backward.
6. How did the Chinese preference for silver affect them?
In 1500, the approximate exchange ratio between gold liang and and silver liang was 1:4. Today it is 1:50. Silver mineral deposits, mining and availability is more elastic than gold. Elasticity of gold production is very low. Secondly, above ground supplies of gold are far higher than known below the ground estimates. Hence, manipulation of gold prices over a period of time is difficult.
Touchy … feely … selly … silly …
7. Current Status
China, as the world’s largest holder of US dollar debt is constrained in its move to increasing gold reserves through market operations. A dollar sell off by China could collapse the world’s currency system – and the biggest loser would be the Chinese! But a negotiated conversion of some dollar reserves to gold is eminently possible.
Between 2000-2007, the Chinese Government increased their monetary gold reserves from more than 300 tons, to more than 600 tons. Official Gold Reserves of Chinese Central Bank Gold reserves are about 600 tons of gold.
China has become the world’s 3rd largest consumer of gold – up from a 100 tons to 350 tons. The Shanghai Gold Exchange has made it easier for individuals to invest in gold. They have reduced the transaction size from 1 kg to 100 gm.
8. Possible Chinese Strategy
China’s investment in US$3 billion in Blackstone Private Equity /hedge fund, was the first by any country. This gives China an inside track to the world’s largest hedge fund and private equity player. The Blackstone Fund on the other, gets access to the world’s largest liquid reserve – more than 1 trillion dollars of the Chinese Government’s monetary reserves.
China is setting up a US$200 billion sovereign fund that will invest in range of markets and instruments. With this institutional framework, for China to increase their monetary reserves by a 1000-2000 tonnes is well within realm of possibility.
9. The 2ndlook alternative (Oct.3, 2008, update)
Chinese assets …
In any new world financial reform proposal, the Chinese voice will be very important. After all they are the world’s largest creditor nation! They have US$2 trillion worth of IOUs with them. Of course, the composition of these US$2 trillion Chinese reserves is a state secret.
The Chinese will not agree to any ‘hare-brained’ scheme by ‘tin-pot’ dictators, who are sitting on some raw materials – and think that the future belongs to them. The world has so many of this variety, that it does not require me to be specific.
The Chinese need to acquire some big ticket assets – maybe, some big US companies, for about US$1.5 trillion and bring down their reserves to US$0.5 trillion. This will reduce US outstanding debt, create demand for US stocks, lift the Dow Jones, and create value for the dollar. As I see it this is the only way that the Chinese can cash in their chips. The House will not let them take it away any other way.
10. What does this mean for others
China, the largest creditor nation in the world, carries a big stick. They are not democratically accountable and transparency is not required from them. Hence, a significant conversion from dollar holdings to gold is feasible, can be done quietly (hence, at an economic price) and with trade power they have, a strong negotiating position is a given.
And that is an opportunity others may not get!
In the last 150 years, strong monetary gold reserves have been a feature of Western monetary systems (acquired mostly, by dubious means like slavery, genocide). China’s moves, if any, will diversify global monetary reserve systems away from the dollar and the West and spread the weightage in a more equitable manner – giving rise to speculation about a renminbi bloc.
And that is something that is good for global monetary system.
What should India do …
Oil Dollar Tango
Two years ago …
This post had estimated that the Chinese could possibly (and they have) increase their monetary gold reserves. On April 24th, 2009, Bloomberg reported that China had increased
its (gold) reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in an interview with the Xinhua News Agency today. China, the world’s biggest gold producer, has increased its holdings before, Hu said in the interview carried on the administration Web Site. They rose from 394 tons to 500 tons in 2001 and to 600 tons in 2003. The U.S. has the world’s biggest gold holdings at 8,134 tons, followed by Germany with 3,413 tons, World Gold Council data show. France has 2,487 tons and Italy 2,452 tons, while the IMF has 3,217 tons, according to the council.
Another report, from Market Watch, a WSJ web publication added,
The increase makes China the world’s fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons. Although Hu did not elaborate on where China had sourced the additional bullion, her comments were interpreted as meaning they came from domestic sources and may included refining of scrap metal. Traders also say the gold was accumulated systematically over a number of years. Last year China ranked as the world’s largest gold producer with 12.2% of world output, equivalent to 288 metric tons. The U.S. ranked second with a 9.9% share, or 234 metric tons.
What are the future plans of the Chinese? A report quotes an analyst
China should increase its gold reserve from 600 tons to about 2,500 tons in a short term and to 3,000 tons in a long term to cope with the versatile exchange rate risks, said Teng Tai, an economist of China Galaxy Securities Company.
Of course, this really does not mean much – except that it may keep gold prices on boil. Whether a currency is backed by a 5% or a 10% gold reserve may not mean much, in this era of rampant use of “a technology, called a printing press” as an economic tool – not just by the US of A. For long term economic stability, gold needs to be in the hands of individuals – and not Governments.
Chidambaram Says … “End 5000 years Of Poverty”
This was Chidamabaram’s statement in the parliament and at least a couple of magazines – including India Today.
Nations Wealth
A nation’s wealth can be a number of things – intellectual wealth, economic wealth, social and political institutions and structures leading to wealth. But primarily, most look at wealth as a measure of economic wealth. And that is what Chidambaram was referring to and most of us accept. Therefore in this write up we will limit ourselves to the economic debate.
A few things.
Obviously, paper money cannot be a measure of wealth. Probably, the de la Rue family would have been the world’s richest family, if paper money was of value. The Bretton Woods mechanism under which the US dollar was the world’s reserve currency lasted as long as it was the only currency on the gold standard. The US Government broke the Bretton Woods mechanism by printing too many dollars. De Gaulle’s French Government started trading in US dollars for gold. In 1971 President Nixon abandoned the Gold standard. Thereafter the world got the first Oil shock and 10 years of stagflation. This French ‘perfidy’ strained US-French relations for the next 30 years. President Sarkozy is today trying to change that – and he can. The casus belli – the US dollar is no longer an issue. Today the US is the world’s largest debtor nation.
Measure Of A Nation’s Wealth?
How does one measure a nation’s wealth? A reliable method is, of course, gold reserves.
India’s private and governmental reserves of gold are by far the largest in the world. Estimates of total Indian gold reserves vary between 25,000 to 30,000 tons. The next highest is the United States with 14,000 tons of gold – with the US Govt accounting for 8000 tons. For at least the last 50 years, India has been world’s largest consumer of gold. (Pliny lamented 1800 years ago as to how imports from India were draining Rome of gold. In 1960’s, James Bond was sent after an arch villian, Auric Goldfinger, to close down illegal gold export from Britain to India in Goldfinger – the book.)
Secret of Japan’s rise
Year 1542. The Sado gold mines were discovered. In 16th-17th century, Japan became the second largest producer of gold in the world. Rapid rise of Japan after that and the rest of story is known to the world. Korea claims that Japan plundered Korea of hundreds of tons of gold from 1937-1944. Philipines, Indonesia have all raised claims against Japan for war time gold loot. Regardless, one American writer had definitely hit a jackpot – Gold Warriors: America’s Secret Recovery of Yamashita’s Gold (
Sounds like a 5000 years of poverty?
The intellectual father of India’s freedom movement was a British MP of Indian origin – Dadabhai Naoroji. His seminal work on the British colonial loot of India cut away the legs of the Raj – and thereafter, the Raj could not stand. Statistical analyses by Angus Maddisson, Groningen University showed India with a world trade share of 25% for much of the 500 years during 1400-1900.
India loss of wealth is a recent phenomenon. This trend of increasing poverty was halted only with Indian independence and subsequent growth of the Indian economy.
India’s rapid economic decline in the first half of the 20th century is what Chidambaram refers to as the 5000 years of poverty.
Lees Mody Pact
October 28th 1933. Much of India’s Hindu rate of growth can be traced back to this date. On that day, the Bombay Mill Owners Association signed the Lees-Mody Pact. This earned all Indian industrialists Nehru’s distrust. The British had succeeded once again in divide-and-rule.
Japan had become the largest buyer of Indian cotton – in spite of imperial preferences. Lancashire was hurting. Duty on Japanese textiles was raised from 31.5% to 75%. Japan stopped buying Indian cotton in retaliation. Cotton prices crashed. Montagu Norman was already wreaking havoc with his economic policies. demand had collapsed. Britain agreed to “help”. Customs duty was lowered for British goods only to 20%. Britain agreed to buy Indian stock piled cotton at lower prices. Indian mills and the Indian farmer paid the price. GD Birla said “They have lost their nerve …”. Churchill made life difficult in Britain as this pact did not deliver.
While the whole country was following a boycott of foreign goods (specially Lancashire goods), 21 businessmen led by Homi Mody (father of Russi Mody, Piloo Mody) agreed to the system of ‘imperial preference’ – which was behind India’s impoverishment. Earlier, Homi Mody had warned Gandhiji against the renewing the swaraj movement. The “money famine” had collapsed demand in India.
Mody had his own political ambitions. After Independence, Nehru did try and make up with Homi Mody later. Homi Mody was included in to India’s Constituent Assembly – even though he had served the British well.
Chidambaram Should Look At …
What Chidambaram should focus on is a monetary mechanism to leverage India’s 25,000 tons of gold to make India a capital rich country. From there India can start on its way to becoming the richest economy of the world – again.
Significantly, Chidambaram needs to answer if the Indian defence system is adequately funded for its task of protecting the world’s largest gold reserves!
2ndlook 
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