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mikaelforsberg Post time: 2015-5-5 07:55
China need to buy not only gold but everything there is to buy for the enormous amounts of USDollar ...
Agree, merely selling dollars only crashes the market. But using it to buy gold and other hard assets increases the backing of the Yuan, which can be traded in the future, if need be, for such assets, if China should be asked to redeem its Yuans for any valid reason. One of the best assets that preserve value is gold, but there are others. Unfortunately, land, buildings, factories, mines and resorts in foreign countries can be confiscated by foreign powers, and lack the security of ownership and transferability of ownership that GOLD and other precious metals possess. Transforming China's foreign currency reserves into such hard assets of enduring value, securable ownership, and transferable ownership, is the correct way to dispose of such foreign currency reserves.
Using foreign currency reserves to buy up Yuans, in order to achieve a temporary upvaluation of the Yuan, that lasts as long as Chna keeps spending its foreign reserves to buy Yuans, on the other hand, is the least efficient way to use China's foreign currency reserves, and is the most wasteful way of disposing of it, because what China gets in return, tons and tons of Yuans, it could have simply printed for pennies, or if digitally stored, cost practically nothing to obtain.
Using foreign currency reserves to buy up Yuans is also the most self-destructive way to use such reserves, because they are used to overprice Chinese products abroad in dollars and domestically in yuans, that leads to the destruction, closure, and bankruptcy of these manufacturing firms, their secondary tier of businesses, and the banks that lend them money. What the PBOC achieved in using dollar reserves to buy up Yuans in order to prop up its exchange rate is equivalent to China committing suicide by hanging itself with its own rope of foreign currency reserves, a rope that is 3.9 trillion dollars strong, and unbreakable by any private consortium of manufacturers and banks, including all the SOES combined. They shall all be hanged by the current Yuan exchange rate until they all perish.