Is China’s Gold Plan Revealed in its Yuan/USD Forex Charts?

yuan/USD 35-year chart

At first glance at the above chart, there seems to be no hidden prediction about China’s gold plan and the global monetary future apparent whatsoever. However, interpretation of the above chart must be combined with knowledge about yuan note denominations during this time, and in periods preceding the above timeline for clues to start unraveling about China’s gold plan and the global monetary future.

When I visited Beijing and Shanghai a few years back, my first observation when exchanging US dollars into their national currency of yuan was the fact that their largest denominated paper note of 100 yuan was so small, about the equivalent of US$15 back then, and only a few pennies above US$14 today. My first thought, after this observation, was why their largest denominated note was of such low purchasing power, especially since I had visited many surrounding SE Asian nations of far poorer economic status than China that had much larger denominated notes in terms of purchasing power. It seemed to make no sense, especially since restaurants and brand name stores abounded in both of those cities in which many items available for purchase ranged from a few hundred to a few thousand US dollars. Imagine if one wanted to purchase any luxury good item that cost $5,000 in cash. One literally would have to carry a stack of more than 350 bills into the store to pay for that item in cash. Even the simple act of dining at a higher end restaurant in those cities required carrying a stack of more than 20 bills to pay for a dinner for two, certainly not the an act that is accommodative to most since twenty notes do not even fit comfortably into a wallet.

When I asked my friends that lived in Shanghai why this situation existed, they did not seem to know as they had never really given it that much thought, as it was just “normal” to them to pay for any item of higher price with a credit card. They, like I, did not consider that this decision could be a consequence of China’s gold plan. Of course, the easy answer to this question seems to be that by making the highest denominate currency note of so little purchasing power, and forcing an entire nation to digitally pay for any reasonably large purchase of just a few thousand dollars, that such a decision was a tracking decision. That by doing so, the CCP could keep tabs on every single one of its citizens spending habits since it was near impossible to pay for any large ticket item in cash.

However, the more I thought about it, even though the last time I was in China was perhaps seven or eight years ago, such an answer seemed too simple to be true even though the application of Occam’s Razor to this question would yield such an answer. So I started asking more questions to determine if the PBOC’s reluctance to print a larger denominated note than one that was the equivalent of fourteen to fifteen US dollars might actually reveal something significant about China’s gold plan and the global monetary future.

The lowest exchange rate visible on the chart above was approximately 1.6 yuan to the USD in 1981, but if we traveled back in time for just one additional year to June of 1980, the exchange rate then was only 1.48 yuan to the USD. At this rate, a 100 yuan note, the current largest denominated note in widespread circulation in China, would have been worth closer to 68 American dollars versus its current exchange rate of a mere fourteen dollars. So, just 36 years ago, the 100 yuan note actually would have been an extremely large denominated note versus its consideration as a paltry-sized denominated note today, especially since $68 in 1980, when adjusted for real inflation rates (and not the “official” government calculated inflation rates), would have been the equivalent of several hundred US dollars today.  As is easily observable above, over a brief fourteen year period, from 1980 to 1994, the yuan rapidly devalued against the US dollar, from an approximate exchange rate of only 1.5 yuan per one US dollar to a rate multiple times higher at 8.7 yuan per one US dollar.

Thus, the question remains as to why the 100 yuan note remained the largest denominated note issued by the PBOC during this fourteen year period, as nations’ Central Bankers typically issue increasingly larger notes when their policies cause rapid purchasing power devaluation. For example, we all have seen the photos of 10,000,000 Zimbabwe dollar notes circulated widely in 2008 and 100,000 Indonesian rupiah notes circulated after the 1997 Asian financial crisis.

hyperinflation of Zimbabwe dollar
hyperinflation of Indonesian rupiah during 1997 Asian tigers financial crisis

And since China has had a rich history of hyperinflation, including periods in their history when their paper fiat currency became completely worthless as happened recently in Zimbabwe, and periods more recently during the late 1940s when they issued 50,000 yuan notes, why did they not increase the largest denominated note from 100 yuan to a minimum of 500 yuan in 1994? Of course, the first answer that comes to mind is that China remained a largely poor nation during this time period and its middle class really experienced no significant growth until much more recently.

Therefore, the number of people in China that required larger notes that could afford to buy luxury goods was relatively limited up until the past couple of decades.  Thus, this would answer the question of why the 100 yuan note remained the largest note in wide circulation up until about 1999. But since 1999, the growth of the middle class in China has exploded from just 2% of the population (29 million) to more than 39% of its population, or more than half a billion by 2013, to now 48% of its population (691 million) by 2020.

Even though the CCP government’s definition of middle class in China is quite wide ranging, including those that earn just $7,250 a year on the low end to $62,500 on the high end per year, and most of the middle class growth has been in the lower end of this range, the fact of the matter is that there are literally tens of millions of Chinese with consumption patterns that demand a much larger denominated note than one that is merely equivalent to $14 dollars. So for about two decades, there has been a need for a much larger denominated note in China than the 100 yuan note but yet the PBOC has remained steadfast in capping the largest yuan note at 100. So what gives?

Though the yuan has strengthened slightly from 1994 to 2020 against the USD, now trading at an exchange rate of 7.08 yuan to 1 US dollar in June 2020, it still remains extremely odd, in my humble opinion, that during the entire period depicted in the chart above, given the explosive growth of the Chinese middle class since 1999, that a 100 yuan note remained the largest denomination in China. It remains odd until one considers the following factor. The ruling class in China is well known for playing the long game in policy matters, including monetary policy. It is not rare for them to have a 50-year or even a 100-year plan versus the typical 1, 5 and 10 year plans implemented by the ruling class of Western nations.

Therefore, under a 50-year plan that would extend out to the year 2030, could it be the ruling party’s plan to bring the exchange rate of the yuan to the US dollar from its current 7:1 rate to a range of about 3-4:1 that would equal the exchange rate that existed from 1985 to 1990? If such an exchange rate materialized over the next five to ten years, then a 100 yuan note would no longer be considered such a small note in terms of purchasing power, much as it was not considered a small note during the 1980s to about 1990. What event could cause such a massive surge in strength of the Chinese yuan versus the US dollar? The answer is China’s gold plan, both in the intermediate and long-term.

Recall that in skwealthacademy podcast #109, I discussed the hoarding of the Swiss Franc versus the Euro throughout the EU when the franc was still backed by gold until Swiss National Bank bankers intervened and destroyed this element of the Swiss franc. I also discussed that even as Central Bankers destroyed the Swiss constitution’s mandate that the Swiss franc must be, at a minimum, 40% backed by gold, and continued to deplete this percent backing every year, that even a degraded backing still manifested in Gresham’s Law to the point where the franc almost reached parity to the Euro at a 1:1 exchange rate in 2014. If the PBOC officially backed the yuan with their massive national gold reserves, as Switzerland once did with their franc, then the yuan easily could rise to a 3 to 4 exchange rate against the US dollar.

Thus, the trillion dollar question is the following: Has the Central Bankers’ decision during the entire period depicted in the chart above to leave the 100 yuan note as the largest denominated note in China a result of a China’s gold plan that they have not shared with the world that will result in the 100 yuan note once again becoming a note of large purchasing power, and therefore the reason they never decided to create a larger note than the 100 yuan note, even when such a decision seemed logical for the past two decades?

Note that if money laundering activities and acceptances of bribes is far easier to track among its population due to the capping of national notes at such a small denomination, than the same corruption that tends to be rampant among the ruling class becomes just as easy to track. And this is definitely a built-in facet of a national monetary platform that the ruling class would never desire. Consequently, it is my belief that the PBOC’s decision to leave the largest denominated yuan note at a mere 100 has much more to do with just the desire of the CCP’s leaders to track the spending habits of every one of its citizens.

Of course, the possibility remains, as I originally pondered at the start of this article, that such a small face value for its largest denominated note may simply be about the desire of the CCP to convert all of its citizens into using digital currency to surveil 100% of all transactions. Because Chinese ruling parties have a much longer time frame for policy implementation than Western government ruling parties, and bitcoin started trading at the start of 2009, the existence of a secure digital currency has been widely known for more than half of the time period that a larger than 100 yuan note was needed in China to serve the consumption patterns of a growing middle class. Thus, a long-term plan to convert every citizen into using digital currency 100% of the time may have been the driving force to leave the largest denominated note at such a small face value.

Earlier this year, the Chinese government became the first government worldwide to roll out a test of its State sponsored digital currency in four cities, Shenzhen, Suzhou, Chengdu and Xiong’an, in preparation for a nationwide rollout in one to two years. In addition, since China’s digital yuan runs on a platform, near field communication, of NFC, that does not require an internet connection to function or even a bank account, even Chinese citizens that live in remote villages will be able to have and use a digital yuan wallet. NFC is contactless communication between electronic devices that allows a user to send information, including financial transactions involving digital currencies, between two NFC compatible devices. Since all information must be sent over an encrypted communication channel and the two devices must be within 4cm of each other for communication to occur, the probability of fraud occurring through this payment system is believed to be remote.

However, the most important development of the China state sponsored digital yuan is that widespread adoption domestically would obviate the reliance on the need for the internationally recognized SWIFT system to execute corporate currency transfers. One of the biggest concerns not only for China, but also voiced by finance ministers in Germany and in many European nations, is how US Central Bankers threaten to cut off access to the SWIFT system to control political agendas around the world.  Being free from the potential of these financial blackmail threats would allow nations to operate independently without interference from US and UK Central Bankers.  From an international perspective, most financial analysts believe that it will take years, perhaps even decades for the yuan to gain widespread use, even if the launch of the digital yuan is a massive success, simply due to the fact that people are going to question the stability of the yuan’s purchasing power as China’s economy is still emerging.

One factor that could quickly transition the world’s perspective about the Chinese yuan is if the PBOC decided to back it with gold, especially given the fact that Central Bankers have greatly devalued the Swiss franc in its gold backing from its once Constitutionally mandated 40% backing, which it held for decades, to just 8% by the end of 2014, to even a lesser percentage today. So what is the ultimate reason why the largest denominated yuan note has remained so small for decades? My guess is that it is due to a combination of a long-term government plan to back the yuan with gold (either partially or fully) and to increase the surveillance of all spending habits of their citizens.

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