China’s monetary authority has done it again. After surprising everyone but a small group of futurists by partially adopting a gold standard to back their national currency, China’s launch of the eYuan has set the cat among the virtual currency pigeons.
A decade ago, in 2005, the Chinese Yuan (CNY) was pegged at 8.28 to the US Dollar (USD) before being abruptly allowed to ‘float’ upwards, but under strict control of the People’s Bank of China, the monetary authority. By June 2012, relaxations of the ‘trading band’ for the renminbi/yuan (confusingly referred to as RMB or CNY in the same document) saw the yuan trading at 6.35 to the USD, an appreciation of 30% in seven years.
But with such a strong currency, and trillions of dollars in foreign reserves, China had been quietly buying up gold. In 2013 they stunned the forex markets by announcing a free float for the yuan – and by the way, it was backed by gold to the tune of 18% of issued currency. Within weeks the CNY/USD rate was at 5.05 and trading nations around the world began to see the yuan as the reserve currency of choice.
Long the ubiquitous cash currency of African states, USD fell from grace overnight, particularly as most foreign trade was with China anyway! Now it was RMB being traded freely on the streets of Lagos, Luanda and Lusaka.
But the announcement yesterday of the launch of the eYuan will herald a new epoch in global currencies. Freely tradable online and on smartphones, China’s electronic currency is not only backed by gold, but convertible without commission into any major currency worldwide – by the People’s Bank of China itself!
Why would anyone want to use any other currency for electronic transactions? Reaction from the European Central Bank and US Treasury has been muted. They are still considering their position; but really they have no choice but to accept the new paradigm.
ANALYSIS >> SYNTHESIS: How this scenario came to be
To quote Chuck Butler of The Daily Reckoning:
Speaking of the renminbi/yuan, I know that I told you all this a long time ago, and if you’ve heard me talk about China in any of my many presentations the past couple of years, you’ll recall me telling you why I thought China was hoarding all the gold they’ve been buying and producing over the past five years. I personally think that China is preparing to back their currency with some percentage of gold. Now, I ask you this: Should the Chinese float the renminbi/yuan with a gold backing of some sort, wouldn’t that make it the most-attractive currency in the world? And wouldn’t it go a long way toward what the Chinese really want, to remove the dollar as the reserve currency of the world? Yes, it would!