China’s Hegemony

What do you see, when you hear “global hegemony”, or “empire”? Probably Rome with its highly disciplined legions. Or maybe the US with its famous Navy, including nuclear-powered ships. But China also was once a global hegemon. OK, we know – it was a long time ago, in Ancient Asia. However, after years of oblivion, the Red Dragon woke up. And some people say that China is on the way to replace the US as a global hegemon. Are they right? And what would it mean for the gold market?

Will China Become the Next Global Hegemon?

We have to start with the observation that Chinese hegemony would not be unprecedented. In a sense, what we are now observing is just the return to the normal. As one can see in the figures below, the earth’s economic center of gravity was located in Asia for the most of the time. Only after the Industrial Revolution, it shifted towards Atlantic Ocean. But now, largely due to the economic rise of China, it’s returning to Asia.

_{Figure 1: Evolution of the earth’s economic center of gravity from 1 CE to 2025 (source: McKinsey Global Institute)}

However, the rebirth does not mean hegemony. And pre-eminence does not imply dominance. In the foreseeable future, China will not be able to replace the US. Why? First, the US spends three or four times more on military spending, and it will maintain its predominance for years. Second, the US has stronger “soft power”, or bigger nexus of allies, while China has not got too many friends. Japan, South Korea and India co-operate with the US and rival with the Middle Kingdom in the region. Third, institutional inertia favors the current international order. Hence, we are heading toward multi-polar world, but not toward China’s dominance.   

China’s Hegemony and Gold

What does it all mean for the gold market? First of all, gold bulls should not count on gold’s rally due to the replacement of the US by China as a global hegemon. This is not likely to happen anytime soon. It means that the US dollar will remain as a dominant fiat currency in the world, exerting important influence on the gold market.

But what will happen if China eventually becomes global hegemony? Well, in many years from now, this scenario may realize.The decline in the US dollar may be supportive for the gold prices. However, if yuan replaces the US dollar, the demise of greenback may not be very positive for the yellow metal. It will find itself, then, under pressure of renminbi instead of the US dollar. We don’t see any material progress here.

Actually, if China reforms the current monetary system, implementing a more stable one, gold may struggle as a safe-haven asset (gold standard does not imply rallying gold prices). So, be careful what you wish for!

If China replaces the US as a global hegemon in a volatile way (severe conflicts that could include or result in a large-scale war), gold would likely soar based on the safe-haven demand, but if the transition is calm and peaceful, then the gold market may be barely affected.