What should China demand in return for help in combating economic crisis?

November 16th, 2008

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Even before this weekend’s G20 Summit, there was a lot of rhetoric on international solidarity and cooperation to tackle this global economic crisis. Since this crisis is a shared curse of every nation, global leaders pledged (or at least agreed nominally) coordinated action in a spirit of teamwork and camaraderie. After all, one of the reasons why the Great Depression was a depression instead of a severe recession was because of the spirit of self-interest, blame laying and cliques among the nations.

China gave indications that it will help in the bailouts via the IMF (see China ready to help tackle crisis via IMF). No doubt, there will be expectations on China to fork out a substantial part of its massive hoard of US dollar reserves to do so.

But will the Chinese government just help for nothing? Domestically, they have their own economic worries and problems to tackle. Naturally, their domestic needs will take the first place. As such, this will have negative repercussion on the US economy (see Is China?s pump priming bad for the US?). At the same time, the Chinese are too subtle to act so belligerently in the open.

What should the Chinese do then? To answer this question, we will put ourselves on the shoes of the Chinese. What will we do?

Well, if we are to dip into our hoard of US dollar reserves to help in the bailouts and rescues, we will demand one thing in return- the IMF’s gold reserves. China has only 600 tones of gold reserves whereas the IMF has around 3200 tonnes. If we can swap our US Treasuries/dollars for IMF’s gold, we will kill 4 birds with one stone:

  1. Be Mr. Nice in the eyes of the world because of our ‘generosity’ in sharing our US dollars.
  2. Increase our gold reserves by more than 6 times in one swoop.
  3. Leave the market price of gold unmolested.
  4. Getting rid of our US dollars without causing a destabilising run in US dollars in the forex market. This will reduce the vulnerability of our national savings in the hands of the money printers running the US government.

The only hitch is that at today’s gold spot market price, China’s current US dollar reserves of US$1.9 trillion can buy up half of all the gold ever mined in the entire history of humanity.

Anyway, we are not them and hence, we don’t expect them to act like us.

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