Transcription
Welcome back everyone to the second segment of "Stock Market C-See." We continue to have Mr. Shi and Professor Lei with us. In the last segment, we discussed some issues in the United States. In fact, there was a recent report that garnered quite a bit of attention: the value of gold reserves held by central banks worldwide, after adjusting for interest, has for the first time surpassed that of US dollar reserve assets. The market value of global central bank gold reserves is approximately $5.5 trillion USD, while dollar reserves are around $4 trillion USD. I wonder what both of you think about this historical moment, where gold has surpassed dollar assets for the first time. Does this represent an accelerated downward trend for the US or the dollar? Or are there other factors at play? Professor, what are your thoughts on this matter?
I believe others are less bold about holding dollars. The reason is the policies enacted by Trump's administration. If you buy new bonds, they might suddenly impose sanctions on you, or even confiscate them, and refuse to return them. Holding them is like a ticking time bomb. Others know how to protect themselves, so naturally, they would convert to other assets. What should they convert to? In reality, there aren't many options. The dollar should account for a total foreign exchange reserve, if I recall correctly, around 57-58%. Gold, on the other hand, is a useful commodity. Since ancient times, people have trusted gold. If there were a war, people would trust gold more than the dollar. About 5 years ago, I also had friends who advised me to hold some gold. It wasn't for investment returns; it has indeed appreciated significantly. I considered it for survival. Holding enough gold, if there were a war, could ensure your survival. Holding dollars might not be able to do that. Conversely, gold is safe.
However, we must also consider another factor. Many central banks want to increase their proportion of gold holdings. Looking at China's figures, although they have increased their gold reserves, the increase on the surface isn't that significant. They currently hold over 2,000 tons of gold, while the US holds over 8,000 tons. In reality, it's not a lot of money. China's over 2,000 tons is approximately over $300 billion USD. While over $300 billion sounds like a lot, it's not a large proportion of their national reserves. Therefore, I personally feel that in the long run, from a central bank's perspective, holding more gold is quite reasonable. As the dollar reserves become less reliable, and considering the professor's mention of Trump weaponizing the dollar, which further weakens its position, Mr. Shi, do you think this trend will continue, meaning the dollar will continue to fall?
You just mentioned that gold has surpassed the dollar for the first time in terms of reserve value for central banks. I believe this is a recent development. It only emerged after the dollar became the international currency. Historically, the gold standard lasted much longer, so everyone used to hold gold. However, after the petrodollar system, because everyone needed to buy oil, and Middle Eastern countries cooperated with the US to accept dollars, it became the currency everyone used. In fact, I think the reason for choosing the dollar over gold for reserves in the past was based on the US being the strongest nation in the world at the time, with advanced technology, military power, politics, and soft power. Therefore, people felt holding dollars was better. Holding gold yields no interest and incurs storage costs. Holding dollars yields interest, and buying US bonds is stable and provides interest. So, for a period, central banks continuously reduced their gold reserves and converted them to dollars.
However, this situation is beginning to change. One factor is the ever-increasing US debt, which is now close to $39 trillion, almost $40 trillion. Some say it exceeds $40 trillion, depending on the statistical method used. This is just federal debt, not including local or private debt. If the US were to genuinely commit to repaying its debts and tighten its belt, people might trust it a bit more. But they show no preparation for repayment, are heavily indebted, spend recklessly, and are involved in wars everywhere. Even with credit cards over their limit, they should be more frugal. They have no such preparation. Therefore, people are increasingly losing faith in it. I mentioned earlier that I have encountered some funds, including pension funds and insurance company funds, and they are all worried about one thing: they have too many dollar assets in their portfolios and want to reduce them. Previously, private banks helping clients invest often allocated 60% to US bonds and 40% to stocks, with these stocks being US equities. Now, things are starting to feel wrong. They feel that many of these assets are guaranteed by the state and institutions, and there's a high chance of problems arising. Therefore, they want to buy assets like gold, whose value is inherent and naturally exists. These are tangible assets. Besides gold, I'm involved in real estate. Perhaps people think I'm just trying to sell it, but we've had a lot of contact with foreign funds wanting to invest in real estate projects. Firstly, it's a tangible asset. Secondly, it generates rental income. Moreover, as more people demand tangible assets and less of those paper certificates, demand naturally increases. For example, student dormitories, as mentioned earlier. The number of overseas students in Hong Kong is growing rapidly, and demand is high, with returns of 4-5%. Currently, the US federal funds rate is just over 3%, and bonds offer around 4%, but they carry risks. Therefore, finding tangible, profitable, and stable assets to replace the dollar should be the dominant force in future financial markets.
Besides gold and real estate, many people are concerned about whether an asset will partially replace the dollar: the Renminbi. Last week, the China Securities Regulatory Commission announced that it would allow eligible overseas investors to participate in China's treasury bond futures trading. Do you both believe this move or policy is actively promoting opening up to the outside world and potentially attracting more capital to support China's development? Professor, what are your thoughts?
Let's look at history. Over a hundred years ago, in terms of total GDP and other aspects, Britain's national strength surpassed that of the United States. However, it wasn't until after 1945 that the pound was completely surpassed by the dollar. This means that for the Renminbi or other currencies to surpass the dollar, it won't happen quickly. If I look at current figures, the Renminbi as a reserve currency is only around 2%, which is still very low. However, despite its seemingly low proportion, it already poses a significant threat to the dollar. Where does the threat lie? Firstly, many people are now losing confidence in the dollar. But are there other assets or currencies that can replace or partially replace the dollar? Not many. The Renminbi is one of them because many transactions are now starting to be conducted in Renminbi. Also, in conflicts like the one in Iran, China buys oil from Iran and can already use Renminbi. If this trend continues, the US is very fearful. Although the proportion is still low, an alternative option exists. If others or certain countries are using the dollar, the US threatens them, saying, "If you use the dollar, you must obey me, or I will sanction you." If other countries have no other choice, they are in a difficult situation. But as long as another option exists, the Renminbi, when the US threatens a country, it can immediately switch to using the Renminbi. This weakens the effectiveness of many of the US's foreign and economic policies. Therefore, the US dislikes this situation very much. However, I don't think this trend can be stopped. Why did the dollar become the international currency? As Mr. Shi mentioned earlier, it was because you could buy oil with dollars. And why did Saudi Arabia agree back then? Because the US signed an agreement with them in 1973-1974, selling them weapons and providing protection, essentially charging a protection fee. The US was the big brother. Yes, but the condition was that oil purchases would be priced in dollars. From 1976 to the present, the US has never had a trade surplus in any year; it has always had a deficit. Why can it do this? It's because people trust it. You print money, and others are willing to accept it, allowing for deficits. But this world may also slowly change in the future. I think so.
Mr. Shi, do you think that if more people are to buy Renminbi or use it as a reserve currency, the Chinese government needs to implement any specific policies? Currently, the Renminbi's capital account is not fully open. If you hold onshore Renminbi, it's not easy to convert. This is one reason why it's not easy for the Renminbi to replace the dollar so quickly. If you have money in mainland China now, you can deposit it in a bank... it's not a credit card; it's a debit card that requires a deposit. Mainland Chinese can spend money in Hong Kong, for dining, entertainment, and so on, which is fine. But if you want to buy property for investment, that's not possible. When you invest in mainland China, they often still require you to invest in dollars. So, from this point alone, you can see that they themselves haven't fully de-dollarized. You need dollars to invest in mainland China, and when you buy goods for China, you might still calculate in dollars. Some are starting to calculate in Renminbi. In fact, China is the world's largest exporter. If they want to receive Renminbi, the demand for Renminbi can immediately surge. The Renminbi cannot immediately become a reserve currency, but it can occupy a much larger proportion of transaction settlements than it does now. From this perspective, the Chinese government itself has not yet deployed a strategy to use the Renminbi to replace the dollar. However, those who own assets are increasingly losing confidence in the dollar and US bonds. Therefore, they are increasing their holdings of gold and property, merely as a hedge against their dollar assets, a way to reduce risk. It hasn't completely replaced it. So, you ask if the Renminbi will quickly replace the dollar? I don't think so. The Chinese government itself is not ready to do so.
I completely agree with that statement. The Chinese government itself is not intending to bring down the dollar; it doesn't have any particular benefit from it. The Chinese government needs a stable environment for international trade and investment. The dollar is commonly used and familiar, so they will continue to use it. They see the dollar as a tool. So, what's the issue with the Renminbi? It's because the Renminbi is not freely convertible, meaning it cannot freely enter and exit China's borders. There are three things: originally, everyone hopes to achieve all three goals: a stable exchange rate for the currency, an independent monetary policy, and the free flow of capital. In economic theory, you can only achieve two of these. China has chosen not to have free flow of the Renminbi, which is unavoidable. Hong Kong has chosen not to have its own monetary policy, opting for a linked exchange rate. Every country has to make choices.
As for Hong Kong, everyone is talking about how if China sells goods to Middle Eastern countries, there will be demand for the Renminbi, as China is the largest exporter of goods. However, people in the Middle East, for example, when they sell oil to China and receive Renminbi, they will eventually want to buy Chinese goods with that Renminbi. But after receiving Renminbi, they don't immediately buy Chinese goods. They will hold onto that money. They won't just let it sit there; they will want some return. But how can they get a return? Hong Kong is just a transit point. Ultimately, that Renminbi must be invested back into China to produce those goods and generate returns. Otherwise, there will be no returns for no reason. However, will Hong Kong effectively help other countries, including those in the Middle East, invest their money in mainland China and earn interest or returns? This is still an unresolved issue. During this transition period, gold might play a role. Because gold is also... if you hold Renminbi, it's better to use Renminbi to buy gold in Hong Kong and hold on for a while. So, Hong Kong's goal of becoming a regional gold reserve center with a storage capacity exceeding 2,000 tons is quite ambitious. Who will buy that gold? Who will hold it? Just leaving it there won't work. It might include money from the Middle East, perhaps even using Renminbi to come to Hong Kong to buy gold. Mr. Shi, have you heard of this idea? Do you agree that Hong Kong plays a very important role in the flow of Renminbi?
I believe that in terms of physical gold transactions, China's volume now exceeds that of many places in the world. The US controls the futures market, while China influences the physical gold market. In the futures market, investment banks or the US government, I believe the US government doesn't want gold prices to rise too much, as a significant rise would steal the dollar's thunder. Therefore, they will suppress gold and silver at appropriate times. How do they suppress it? They rely on the futures market. As long as someone feels the price will fall in the futures market, they can sell. This leads me to believe that China wants to gradually increase the influence of the physical gold market on the international financial environment. In the past, because the Renminbi was not fully convertible, if gold was bought in mainland China, it could be stored in Hong Kong and freely exchanged. The physical gold market... Hong Kong has always had futures trading, so it can easily connect with the futures market, and its say in the international financial environment may increase. This might be something China is currently deploying.
I wonder what our viewers think about the recent topics, including the weakening dollar and Hong Kong's role. Please leave your comments in the comment section. Thank you, Professor Lei, for joining us today. We have the "Stock Market C-See" program every week. If you like our program, please Like, Share, and Subscribe. See you next week.