The notion that China is trying to back its currency (the RMB) with gold, in some effort to create a convertible RMB gold standard, is a bizarre libertarian fantasy that you can see on their blogs.
First, what do they mean by “back”? Do they mean China will back its currency 100% with gold? Or just 60% or 50% or 40%?
Since most of the “hard money” libertarians want 100% gold backing to money, it is difficult to see how they would be satisfied with anything except something close to 100% backing.
But a question occurs: is there even enough gold in the world to back the RMB with gold?
According to this, China’s broad money supply (M2) reached 113.18 trillion RMB by February 2014, or about $18.18 trillion US.
Unfortunately, the total value of world gold supply as of August 2013 – even at what many think are inflated prices – was about $9 trillion. I am assuming from this graph that the total value of world gold supply today would be somewhat less than $9 trillion.
Nevertheless, even at the August 2013 gold price, China would have to buy up every single piece of gold in the world, including bullion, gold coins, and gold jewellery, to back just 49.50% of its total broad money supply.
A far more conservative estimate here suggests that official government holdings of gold in China as of this year might be about 2,700 tonnes: that is, worth about $110 billion US. This, however, is less than 3% of China’s foreign exchange reserves.
With $110 billion US worth of gold, China currently has enough gold to back just 0.006% of its total (M2) money supply.
Of course, a massive effort to buy up the world’s gold supply would raise the price of gold, but about 20–25% of gold stock is held by Western central banks, and they are not going to sell their gold to China any time soon.
And if China really made a move to start buying up massive supplies of gold, it is likely that a concerted Western foreign and strategic policy (probably including Japan) would quickly counter it.
All in all, the notion that China could ever back more than small fraction of its currency in gold is a fantasy.