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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: long-gone who wrote (8143)	10/9/1999 12:23:00 PM
From: m.philli	Read Replies (2) \| Respond to of 81092

Beijing blues, gold and inflation. I'd like to post a couple of excepts from the book "The Central Bankers" by Marjorie Deane &Robert Pringle with a forward by Paul Volkner. How is the reform of the Chinese gold market and the possible devaluation of the yuan (is this inflationary?) likely to effect Chinese gold demand. Could it be that inflation in China may turn out to be as important to gold demand as inflation in the western world? EXCERPTS FROM THE BOOK: "When one of the authors visited Beijing late in /93, the reform programme had reached another critical stage. Inflation was again becoming a threat---and Chinese society has a peculiar horror of inflation as disruptive of Confusion ideals of social stability and order. China's leaders were well aware that the Tiananmen Square were sparked off by fears of inflation as well as by a revulsion against widespread corruption. Moreover the Chinese have experienced hyper-inflation more recently than the Germans and are not allowed to forget the experience. ------ A word on the great inflation. Between 1937-1947, wholesale prices increased at least 100,000 percent and the money supply by 15,000 percent---principally as a result of increased note issues of the Central Bank Of China. The communists did no better in the parts of China they occupied (they entered Beijing in 1949); they set up central banks in North China, Central China and Inner Mongolia. In 1949, prices rose more than 7,000 percent. When they had established their rule, the communists announced their new central banking policy in 1950-51 in these words: "Instead of issuing huge quantities of paper money, as we were forced to do previously, we are now collecting taxes in a planned way and the finances of our country thus have a comparitively stable foundation". During China's hyperinflation, money lost two of its basic functions- as a store of value and as a unit of account- and was used only as a means of payment. To maintain their savings people used commodities like gold and silver, or consumer goods, or foreign currencies such as the American dollar. To set prices, many shops kept accounts in dollars (using the current exchange rate to set prices in local currency), or used commodity or cost -of-living indexes, calculating prices by multiplying the price of the product in a base year by their current index number.But banknote continued to be used as a means of payment, mainly because most prices were not controlled so the price mechanism could still function despite hyperinflation (carts were used to carry the money about). Although money still functioned in some fashion, the standard of living, especially of poorer people, was drastically reduced as speculative hoarding of goods cut the supply to the market. --------- "In 1993, the country's supreme policymaking bodies, the State Council and Politbureau, assigned a crucial role to the central bank in the struggle to modernize the economy. They looked to the central bank to keep prices under control-not by the old-fashioned methods of price controls but by the indirect methods of using interest rates to control the money supply and monetary demand. The installed a rising political heavyweight, Zhu Rhongyi, as governor with a mandate to push through the changes needed. Zhu faced a daunting task. The head office in Beijing had not been able to bring the lower-level central banks in the provinces of China under its control; several of them still had in effect independent powers of money creation. So when Deng Xiaoping, supreme leader, visited the southern provinces in 1992 and called for even more rapid economic growth, the provincial governments fell over each other in the rush to start massive infrastructure projects-all financed by credits from their local branch of the central bank. This triggered the sudden worsening of inflationary pressures in 1993-94. This in turn sparked a "gold rush" as people throughout China sought to buy gold jewellery as an inflation hedge, showing their discontinuing distrust of paper money. CHINA'S CENTRAL BANK IS THE LARGEST IN THE WORLD IN TERMS OF STAFF, EMPLOYING MORE THAN 100,000! (and we think we have trouble managing price stability in the U.S. AND CANADA, HAH.-MIKE