China’s Digital Currency
(Co-authored with Bob Lynch, a global macro strategist focused on currencies, interest rates and cross-asset solutions. He advises and advises investment advisors on institutional money managers, corporations, family offices and high net worth individuals. He previously worked there worked with JP Morgan Private Bank, HSBC and BNP Paribas. www.linkedin.com/in/robertlynch6)
China's digital currency project has been running since 2014
Reports shortly before the COVID outbreak indicated that it could be launched this year. Under normal circumstances, a successful digital currency would reduce payment problems and demonstrate China's continued efforts to advance technology. In the post-COVID era, where the revival of economic growth will be of paramount importance, the potential for improved trade / consumption through an optimized payment system becomes even more attractive.
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To achieve relative stability, the digital currency would have to be more like a “stable coin” that links the value of the currency 1: 1 with the renminbi and essentially creates a digital yuan. This construct would likely be more stable than one linked to a currency basket like the Libra project suggested by Facebook, let alone without fiat currency links like Bitcoin or Ethereum. This would be equivalent to a digital printout of the paper and coin form.
It is not yet clear how exactly the digital yuan will work
It will probably be an app on a smartphone that you register. Of course, there would be robust security and a record of every transaction both locally and elsewhere. If you get paid or receive money from now on, it will be transferred directly to your secured account. If you pay, it will be debited from the same account.
Chinese consumers are already more familiar than many Westerners with paying almost everything with a smartphone. Alipay is ubiquitous and a digital currency seems to be a modest step in the evolution. Tourists in China already need to access local apps to do basic things, such as: B. secure a trip or buy food or drink in many places.
The sheer size of the Chinese population and economy offers a unique advantage in determining the scope, sales and use of a new digital currency. Sweden plans to launch its own digital crown next year to ban cash transactions in 2023. However, Sweden is a relatively small economy with a relatively homogeneous population where social trust measures are high.
China is pushing to be the first large country to introduce a digital currency, and the pandemic could speed up its efforts. A digital currency may not have the same first-mover advantage as selling books online. Still, a digital currency based on its patented technologies is a prestigious achievement for the status-conscious Chinese elite.
A digital currency recognizes that a payment system is a utility. In the old days, electricity, gas, oil, coal and telephones were utilities, but maybe we have to think about what their modern equivalents are. It replaces this function of banks and credit cards and their derivatives (payment systems dependent on them). It enables instant payments. It squeezes the underground economy, even if human ingenuity finds some workarounds. Tax avoidance is also made more difficult.
At the same time, in an illiberal society, the digital currency can also become an instrument that extends command and control. Every transaction now becomes part of the public record. The already blurred boundary between personal and private could be blurred by the digital currency. The surveillance state can be further strengthened. In a society where social trust is valued, is it difficult to think about fines and rewards?
One thing the digital currency won't do is make the yuan convertible. And if it's not fully convertible, it won't have a significant impact on the yuan's role in the global economy. It is currently a [very] minor reserve currency, although it is included in the SDR. It has less than 2% of SWIFT transactions. The dim sum bond market and yuan deposits in Hong Kong are well below their highs set a few years ago. A digital yuan alone will not help improve its position in dollar rivalry.
In addition, like the 2008 financial crisis, the COVID-induced financial market pressures have shown that the world market favors the US dollar in times of extreme stress and uncertainty. It is not just a function of inertia. It also reflects the market's confidence in the transparency and management of US currency, monetary and fiscal policies compared to most other countries in the world.
A successful digital convertible yuan could drive the internationalization of the renminbi. However, China's management of its financial system and economy, as well as its interactions in global affairs, does not consistently create the confidence that global investors have most preferred in times of severe financial stress.
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This article was written by Marc Chandler, MarctoMarket.
This article was originally published on FX Empire
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