China Bullion - Gold, Silver and Silk

Angus Madisson, researcher at Groningen University, has estimated that through most of last 1000 years, China and India have accounted for about 50% of the world economy. 20th century was different for both. While Indian gold based systems are well known, Chinese gold story is very different.

1. China & Neighbours - Gold Producers

India was always an importer of gold. Domestic gold production in India’s core geography has historically been low. China, on the other is different. China and Mongolia have been significant gold producers in history. Currently, illegal mining in China is big time activity and is indicted for supporting poaching!. Chinese were exporters of gold and silks.

2. Chinese - Great believers in silver

Chinese common coin was a silver coin - the tael (which came from the Malay word tahil; which came from Indian word tol; meaning ‘measure’). There were 2 taels - one was commercially pure silver ingot of one chinese ounce called a liang. The other was a kuping tael - which was coin. Bulk silver was used as currency and called sycee. There were many other taels like Tsaoping, Peking, Tientsin, Hankow, Canton. Chinese also use silver jewellery - against gold preferred by Indian women

3. Chinese invention of Paper

Chinese rulers circulated paper money for longer (from 6th century onwards) and greater area than any country in the world. The first paper currency jiaozi was issued in 6th century - which collapsed very soon. The Song dynasty re-introduced paper currency in 9th century due to copper shortage. Probably, some Jewish merchants were also involved in the jiaozi manufacture.

Kublai Khan’s (a descendant of Genghis Khan) paper money management received wide publicity in Europe (thanks to Marco Polo).

Opium & China

Western consumers bought tea, silks and other Chinese commodities for which they paid in silver. The Chinese did not need much of western goods - like India. To correct this negative balance of trade, Europeans promoted opium in China. When Chinese resisted the Opium trade, wars followed.

In early 19th century AD, Opium imports into China by British, French, American, Dutch, Spanish traders, sourced from India led to an outflow of silver from China - and a currency crisis. The ruling Qing state went into a downward spiral- culminating in the Chinese Civil War and rise of communism. The Kuomintang (supported by Chinese underworld, The Green Gang, The Red Gang and The Blue Gang) was pitted against the Mao Ze Dong’s Communist Party - and both were armed and supported by Western powers.

Opium for China was produced by indebted Indian farmers and a few Parsi traders set up their offices in Hong Kong. However, the Parsi role diminished after the advent of steamships, their big losses during the Opium Wars and the rise of the cotton trade. Other Indian traders, possibly restricted by ’shubh labh’ compunctions played a lesser role (compared to the European traders) in this Opium trade.

Major opium trading companies like Jardine Matheson, David Sasoon & Company and sundry traders set up The Hong Kong & Shanghai Banking Corporation for facilitating this misery. The Chinese Opium problem was finally solved by several draconian measures during Communist rule.

Wars In China

When Chinese resisted the Opium flood, western traders resorted to war. The Japanese emboldened by new found wealth and military technology, joined western powers. The Sino Japanese Wars, The Opium Wars with Europeans and The Boxer Uprising before WW1 imposed large war reparations on the Chinese. The Civil War in China between the world wars destroyed Chinese commerce systems. The Cultural Revolution has left the Chinese commercially backward.

How did the Chinese preference for silver affect them?

In 1500, the approximate exchange ratio between gold liang and and silver liang was 1:4. Today it is 1:50. Silver mineral deposits, mining and availability is more elastic than gold. Elasticity of gold production is very low. Secondly, above ground supplies of gold are far higher than known below the ground estimates. Hence, manipulation of gold prices over a period of time is difficult.

On the other side, China today as the world’s largest holder of US dollar debt is constrained in its move to increasing gold reserves through market operations. A dollar sell off by China could collapse the world’s currency system. But a negotiated conversion of some dollar reserves to gold is eminently possible. Official Gold Reserves of Chinese Central Bank Gold reserves are about 600 tons of gold.

What does this mean for others

China, the largest creditor nation in the world, carries a big stick. They are not democratically accountable and transparency is not required from them. Hence, a significant conversion from dollar holdings to gold is feasible, can be done quietly (hence, at an economic price) and with trade power they have, a strong negotiating position is a given.

And that is an opportunity others may not get!

What should India do …