The yuan, gold and the BRICS
Jennifer Montoya Madrigal[1] , OBELA[2]
In 2024, the price of gold increased significantly, driven by China, which reduced its holdings of U.S. Treasury bonds and expanded its gold reserves. In the same vein, interest rates have fallen globally, which also boosts the price of gold. On the other hand, demand for the yuan as an exchange currency in intra-Asian trade has grown, especially in transactions between the Red Dragon and its trading partners or with countries sanctioned by the U.S., such as Russia, which reduces the use of the dollar. On the other hand, demand for the yuan has increased for international trade as a result of Washington's sanctions against 26 countries, showing a loss of the dollar as a medium of exchange. This article will analyse the rise in the price of gold during 2024, driven by the strategies implemented by the People's Bank of China (BPdeC), such as the issuance of dollar bonds and whether they consolidate the yuan as a reserve currency and turn the country into a global financial power.
China's trade opening began in 1979, which included an influx of foreign investment from developed countries. The People's Republic of China (PRC) and the U.S. signed bilateral trade agreements worth $4 billion, making it its largest trading partner. On the other hand, U.S. companies moved a significant part of their production to Chinese territory, which offered cheap labour and credit, while the Red Dragon obtained the necessary demand for products manufactured on its territory.
In 1995, the PRC joined the World Trade Organisation (WTO) with the help of the U.S. at its inception, but it was not until 1999 that it finalised the agreement and reaffirmed its entry into globalisation. It allowed the country to become the world's factory and expand its trade flows to the point where its exports accounted for almost 50% of its GDP, and its growth rate rose to 14.2% in 2007.
In 2008, thanks to its gigantic trade surplus, China became the largest creditor of U.S. treasury bonds with 585 billion dollars (MMD), at that time accounting for 40% of its total debt. In 2013 it reached its highest figure, $1.3 trillion (see graph 1). Between 1990 and 2010, Asia transformed from a magnet for foreign direct investment and a major commodity exporter to a trading and financial powerhouse, with the yuan as a potential reserve currency.
In 2018, President Donald Trump declared China a competing global power and a threat to his national security. As a result, he declared a trade war on China with trade-restrictive measures. The imposition of tariffs by the U.S. on products originating in China amounted to $50 billion in increased costs at the start of the war. The bilateral relationship, established in 1971 by Henry Kissinger, faced a hostile environment and ever since, the People's Bank of China began a process of disinvestment in U.S. bonds, whose holdings reduced by 36% from 1.2 trillion USD in January 2018 to 768.3 billion USD in May 2024 (graph 1).
Source: Prepared by OBELA with data from the U.S. Department of the Treasury.
The strategy of shifting international reserves has led the BPdeC to increase its holdings of the gold metal. According to the World Gold Council, between 2014 and 2024 it more than doubled its gold holdings, indicating that its strategy of diversifying its international reserves had started before the trade war. Figure 2 shows three important moments in China's gold reserves. In 2009, there was a 75% increase due to the global crisis in order to diversify as it was the largest holder of FED bonds. In 2015 the PBOC announced a 57% increase, driven by the IMF naming the yuan as a freely usable currency and including it in the Special Drawing Right (SDR) valuation basket, making it the fifth currency in this basket. In 2028, they increased their gold position again due to the trade war and reached an all-time high, holding at 2,264.32 tonnes as of writing (17.1.2025), with an upward trend.
Source: Prepared by OBELA with data from Trading Economics.
It shows an inverse relationship between U.S. bonds held by the Asian country and gold reserves, showing the strategy of not holding dollar reserves, which may lead to the consolidation of the yuan as a new reserve currency and the BPdeC as an international reserve bank.
While the gold price remained at high levels since the special military operation between Russia and Ukraine and the Gaza conflict, it reached record highs of USD 2,800 per ounce in 2024, also driven by the lowering of the Fed's benchmark rate and growing central bank demand (see graphs 3 and 4).
Source: Prepared by OBELA with data from Investing.
The strengthening of the yuan
In 2009, the BRICS proposed at the Yekaterinburg summit to create a common currency for the members of the bloc to conduct transactions in local currency. It resulted from the trade in national currency agreed between Brazil and Argentina in October 2008 and now in force within Mercosur. Subsequently, BRICS member countries discussed the possibility of creating a digital currency, given a common currency is not possible as they are very diverse economies with heterogeneous structures. At the end of the first decade of the 21st century, 80 per cent of China's foreign trade was in dollars.
The yuan entered Latin America in 2015 with Chile when they signed foreign exchange and investment agreements the first yuan clearing bank in Latinamerica. In the same year, Argentina's purchases with China began payment in local currency as an extension of the previous agreements between MERCOSUR central banks. Subsequently, China opened the second clearing bank in Argentina. In 2023, they agreed to pay in national currency with Brazil.
Following the outbreak of the special military operation in Ukraine, the U.S. Treasury sanctioned Russia's trade and froze its central bank's USD 300 billion international reserves, held mainly at the ECB. In addition, it expelled Russian banks from the international payment messaging system, the Swift Network (based in Belgium), to block the sale of gas and oil. Sanctions soon spread to other countries that continued to trade with Russia, prompting the Kremlin to shift its reserves into the yuan and gold.
The previous context created the conditions for the Chinese currency to increase its relevance in trade, which led to a rapprochement between Moscow and the Asian giant. In this way, it replaced European demand for energy, which was reflected in a 34.3 per cent increase in imports (1.28 trillion yuan), intended to reach 200 billion dollars. As a result, transactions in the yuan reached record levels, and the Chinese dollar trade contracted by half. According to the Financial Times, the number of bilateral exchanges in Chinese currency grew by 53% compared to the same month in 2021. In response to this, there were renewed efforts to create a means of payment to facilitate trade within the bloc, and all BRICS member countries began to increase their gold reserves, as did China, while reducing their holdings of U.S. Treasury bonds (Figure 4)
Graph 4.
Another sanctioned country was Iran, which moved towards China's sphere of influence. Persian oil companies sold 90 per cent of their exports to China in yuan in 2023. According to data from trade analysis firm Kepler, Iran trades its oil through small Chinese banks. Similarly, Saudi Arabia sells oil and gas to the Red Dragon in its own currency. Non-sanctioned countries such as Pakistan, Nigeria, Iraq, Yemen, Egypt and Turkey have also agreed to trade in the Asian currency. On the other hand, Brazil, its largest trading partner in the LA region since 2008, has bilateral trade worth $150.5 billion annually and trades in local currency. links
Despite China's policy to internationalise the yuan, it is not a major substitute for the U.S. currency in the same way as the yen. According to a Dollar Dominance Monitor tracking study, 54% of all exports trade in dollars, compared to 4% for the yuan. However, in April 2024, the currency overtook the euro as the second most used currency in international trade. Similarly, the SWIFT payment system reported that in the same month, almost 6% of payments were in the Asian currency, and in June, this doubled to 13.37%. In the same vein, the Cross Border Interbank Payment System CIPS, created by the Chinese central bank as an alternative to SWIFT, is on the rise, and in 2023, with a record 194 MMD in renminbi transactions.
To conclude, the increase in gold prices is a consequence of the Fed's rate cuts and the ongoing geopolitical tensions, however, they soared to record levels thanks to the demand from China and the BRICS countries, seeking to replace their reserves in U.S. treasury bonds due to their negative yields and aggressive international economic policy. On the other hand, the BPdeC has halved its holdings in Fed bonds in the wake of the trade war, reshaping the international financial order. Following China's issuance of dollar-denominated treasury bonds in Dubai, a new financial architecture emerges, with China as a stronger actor able to compete with the U.S. and Europe without de-dollarisation. Thanks to constant Western sanctions, such as the most recent one against Russia, the yuan has taken on an even greater presence as an exchange currency, which reduces costs by not having to go through a third currency for trade between the BRICS and ASEAN members. Finally, the strategies implemented by the People's Bank of China (PBoC) drive the rise in the price of gold, and the issuance of Chinese dollar bonds helps to maintain the yuan's exchange rate and consolidate it as a reserve currency, making the country a global financial power without the need of large trade deficits.
