18 June, 2021

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Digital Yuan: China’s Currency Is Going International

By Kumar David

Prof. Kumar David

Though paper money was invented in China during the Song Dynasty in the 11th century it is fast phasing out in consumer transactions; about 80% of payments in China use mobile payment modes meaning cell phones or computers and the market size in 2020 was $6.2 trillion-equivalent in US dollars. Wechat, Alipay and Unionpay are the most used platforms. Some beggars in big cities will not accept alms in cash; you gotta scan their QR codes, enter the donation into your mobile phone and press Transfer. But then begging is dying out in China while homelessness is growing in the USA, so it’s all happening in the wrong place. How topsy-turvy the world has become! No wonder then that the government is exploring and expanding digital transactions linked to the central bank (People’s Bank of China) and also for international payments. The two together will make the Yuan an international currency alongside the US Dollar, Euro, Yen, GB Pound and the Swiss Franc but in a very different way. The Digital Yuan (DY) is supported by block-chain technology similar to Bitcoin making it tamper-proof and it is issued by China’s central bank as a national currency. The motives for internationalising the Yuan are, countering US dollar dominance of global finance, weakening SWIFT and curbing the clout of its own “fintech” giants such as Ant-Group, Lufax, 360-Digitech, LexinFintech and FinVolution. Recently China put the brakes on the listing of Ant; the reason probably was to prioritise the unfurling of the DY.

The Monetary Authority of Singapore and Tamasek have experimented with JPMorgan to establish a Multiple Central Bank Digital Currency Bridge (CBDC). In contrast to a platform unfurled by China, a more neutral and inclusive platform may be acceptable to more countries, but China is already using the DY on a trial basis for transactions with Shenzhen, Hong Kong (HSBC), Thailand (eight banks), the UAE and the Bank of International Settlements. With this CBDC system users bypass services like SWIFT which are used to communicate money transfers between two banks. DY bypasses this system via CBDC links and implements Yuan denominated transactions directly. Since the system is backed by the full faith of the Chinese Government it is rather like an amalgamation of SWIFT and the Fed.

In domestic transactions within China using DY renders credit cards redundant and gives notice to Wechat, Alipay and Unionpay that their days are numbered. Looking a little ahead it may render the banking system itself a creature of the past. You can open an account with the central bank (People’s Bank) and do all your payments and standing order processing in DY without needing a cheque book or credit card – and of course give the government a ring-side view all your financial involvements including those Valentine’s Day roses and Swiss chocolates you gifted to each of your mistresses. What about concealing illicit sources of income and tax avoidance – well on second thoughts, maybe a digital yuan account with the central bank is not such a good idea if you belong to the class whose income is two orders of magnitude larger than this humble columnist’s! So moving all your cash into a digital transactions account with poor out-foxed-by-everybody Lakshman’s Central Bank may be a bit tricky. Still, poor Lakshman’s CB, though on course to crash, will survive for a while longer than the Bank of Ceylon, People’s Bank and Sri Lanka’s commercial banks.

Since DY transactions will not need SWIFT or the dollar, the dollar’s role in international trade and its global hegemony will decline giving the world more choice. Will Iran be able to breathe a sigh of relief? China is the biggest trading partner of 120 countries, why should they depend on the dollar as an intermediary in settling their accounts? Transactions will also be free of the financial risk of adverse intermediate dollar exchange rate movements. The other advantage is that the SWIFT platform entails fees. It is difficult to disentangle what portion of bank charges for an international transfer accrues to SWIFT and how much is pocketed by the bank. My guess is that the total fees collected by SWIFT worldwide runs to hundreds of billions of dollars each year.

There could be a mix of motives in the moves of Chinese regulators. In addition to the overtly political ones I noted, this time it is also leading an assault on Big Tech lenders, stamping out monopolistic behaviour and providing a degree of protection to the public. With the advantage of data monopoly Fintech firms hinder fair competition and seek excessive profits. It is a winner-takes-all industry and no doubt also interferes with the monopoly of snooping on people’s privacy so loved by national security agencies. Ant Group’s IPO halt reflects a turning point. Regulators hit out with antitrust laws targeting bundled sales and price discrimination, tighter rules for online insurance sales and lower annual interest rates after a ruling by the Supreme People’s Court capping rates on personal loans at 15.4% – four times the government one-year loan prime rate of 3.85%. Thousands of court cases show China curbing interest rates of licensed financial institutions at 24%. What about Sri Lanka; is there hope for poor borrowers from rapacious microfinance providers?

The hegemony of the US dollar is anchored in the petrodollar. A 1945 agreement between the United States and Saudi Arabia cemented the relationship between the dollar and oil and the petrodollar was conceived. In 1971 when US stagflation prompted runs on the dollar the value of the dollar plummeted and other countries wished to redeem their dollars for gold, but to protect declining US gold reserves Nixon removed the dollar from the gold standard where dollars were convertible to gold at a fixed rate of $35 per ounce. Currently the gold price is about $1850 per ounce. This devaluation of the dollar also helped the US economy as its export values decreased, making them more competitive but a falling dollar hurt oil-exporting countries whose prices were denominated in dollars. The cost of imports, denominated in other currencies, increased.

In 1973 the US provided military aid to Israel for the Yom Kippur War enraging the Organization of Petroleum Exporting Countries which halted oil exports to the US and Israel’s allies. The OPEC oil embargo quadrupled the price of oil in six months which remained high after the embargo ended. Then came the punch line; in 1979 the US and Saudi Arabia agreed to use US dollars for oil contracts and then recycle the dollars back to America through contracts with US companies. The petrodollar, an arrangement by which all oil will be globally priced and sold in dollars was fully formed and born. Everybody including Iran, Russia and China are caught in this trap. The petrodollar is the mechanism by which the US maintains dominance over the global financial system and it uses this financial power to enforce its foreign policy. For example, the US sanctioned Iran for refusing to halt its development of potential nuclear weapons and hit Russia with trade embargoes for invading Crimea and the crisis in the Ukraine. The countries of the Middle East don’t fight back because their regimes are beholden to US military assistance to hold their own populations in thrall; they also fear that a collapse of the petrodollar system would disrupt their oil trade.

Oil producing countries hold huge dollar reserves and recycle them through sovereign wealth funds. The funds are used in non-oil related businesses. The world’s five largest petrodollar recyclers ranked by assets are: Norway’s Government Pension Fund ($1.2 trillion), the UAE’s Abu Dhabi Investment Authority ($700 billion), Kuwait Investment Authority ($530 billion), Saudi Arabia’s SAMA fund ($490 billion) and the Qatar Investment Authority ($330 billion). These monies are held in US bonds and Treasuries making them partners in the preservation of dollar hegemony.

Sometime in this decade the US economy will fall behind China’s in size to second place. It is not possible for the currency of Mr Number Two to indefinitely remain the global monetary hegemon. But it is going to be a complicated and drawn out process. Though China calls for a replacement of the US dollar as the global currency, ironically, it is the largest foreign holder of dollars. Currently China influences the dollar by pegging the Yuan to it but this an intermediate stage until the DY comes into its own. For the near future there is no sign of collapse of the dollar’s global hegemony. There is also a different kind of threat to the petrodollar as the world shifts from oil to renewable energy. People are limiting greenhouse gas emissions to fight global warming and shifting to solar and wind power generation and to electric vehicles. This threatens oil-producing nations. The US has lost its competitive edge in these technologies to China and the European Union. As a result the role of the dollar as the world’s dominant currency is in decline.

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Latest comments

  • 4
    6

    Nah…won’t happen in a hurry, if at all. Countries who involve themselves with Fintech, like Singapore and Hong Kong are not going to lose out on lucrative business and employment potential for a DY monopoly from China, and for beggars, peasants, and oversaturated digitech companies to trade for free.

    And China is not going to do DY for free either. Places like Port City handling Bitcoin and Crypto for China’s DY would have to work for free (slavery), to make up the costs.

    And US will still use its petroleum industry to keep its dollar up and bury the carbon produced, deep into the earth, and grow super giant Sequoia trees on the site. This +
    digital dollar dealing with emerging renewable energy and best innovation on
    Digitech and Spaceage items.

    • 6
      1

      Do you even have the foggiest about what you are talking about ?RTF

  • 1
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    Rip the dollar!

  • 4
    1

    Ramona Thr Fdo,

    a) Digital Yuan monopoly!!?? Whoever mentioned monopoly? DY will emerge as a global currency alongside USD, Euro, GBP etc. b) Hong Kong (HSBC) is already using it. c) DY is not for ‘free’ whatever you mean by “for free”. Nor is USD, Euro etc “for free” – I have no clue what you mean by this ‘for free’ terminology; please elucidate. d) A giant sequoia or redwood takes about 200 years to reach full girth. e) I rather suspect you are not very familiar with any item of the topics you are commenting on.

    • 2
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      eeakdavi,

      Speaking metaphorically about the giant sequia trees to show that even thecarbon in the ground, they’d come up with a way to remove. But it could be literal also – the carbon could help the trees to grow for 200 years and more, thus converting it to oxygen.

      Hong Kong is probably forced by China to use DY. That’s one of the reasons why they are protesting.
      Their Fintech jobs are all going for this new kind of currency that will make them vassels of the mainland. Their livelihoods gone, and they would have to eventually diamantle as a nation of capitalists and live on the mainland under China’s thumb.

      Certainly USD, Euro are not for free. That’s what the arricle is about. Huge employment possibilities are created around the conventional banking business. Thats howi capitalistic countries operate. That’s how they create jobs for their people.

      China’s DY might look “free” with no banking fees as the article states.
      But they’d spread the cost of operations in other ways. Low operational costs mean little employment and low wages for those handing it.

      • 0
        0

        Ramona,
        “the carbon could help the trees to grow for 200 years and more, thus converting it to oxygen.”
        Really? Convert carbon to oxygen? You should patent this process. Really.

    • 2
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      eeakdavi,

      Speaking metaphorically about the giant sequia trees to show that even the carbon in the ground, they’d come up with a way to remove. But it could be literal also – the carbon could help the trees to grow for 200 years and more, thus converting it to oxygen.

      Hong Kong is probably forced by China to use DY. That’s one of the reasons why they are protesting.
      Their Fintech jobs are all going for this new kind of currency that will make them vassels of the mainland. Their livelihoods gone, and they would have to eventually diamantle as a nation of capitalists and live on the mainland under China’s thumb.

      Certainly USD, Euro are not for free. That’s what the arricle is about. Huge employment possibilities are created around the conventional banking business. That’s how capitalistic countries operate. That’s how they create jobs for their people.

      China’s DY might look “free” with no banking fees as the article states.
      But they’d spread the cost of operations in other ways. Low operational costs mean little employment and low wages for those handing it.

  • 3
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    It’s an excellent article ……… not definitive; nothing ever is …… but a good view into how things might pan out ……

    One can fairly judge how things are going to pan out by looking at the past …… to give a simple Lankan example …….. nothing the Rajapkases have ever done with the Chinese has benefitted the country, starting with the port, Airport, and all the rest of the foolish nonsense. So, it is safe to assume that the Colombo Port City is going to be one mighty cock-up that benefits China, not SL.

    Anyone care to argue with facts and figures how Rajapakses’ past dealings with China has benefitted SL?

    If Past is any guide, China will be the dominant nation in the future. Unlike our idiots, who are there for a quick buck and vanish, they are master planners and strategists playing a long game. Charlie Munger, who is an admirer of their rise to a technological colossus from peasant farmers a mere 40 years ago, said somewhere they copied Lee Kwan Yew’s blueprint.

    • 4
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      And the scariest part is, unlike America, the Chinese don’t depend on immigrants for their brain power.

      Trump, with his MAGA idiots, who haven’t or couldn’t contribute one iota to make America great …… had one last hopeless cry of desperation in a downward spiralling endgame …….. can’t pin it down, but perhaps of white-privilege ……..

      For the sake of balance/counterbalance, I don’t want America to be second best ……. but hopes and wishes are not what “cycles” humanity ……..

    • 1
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      nimal fernando,
      “Anyone care to argue with facts and figures how Rajapakses’ past dealings with China has benefitted SL?”
      —-
      Rajapakshes dealings with China helped Sri Lanka to get rid of Tamil terrorists who massacred Sinhalayo for three decades to grab a part of their country to create a separate State for the Dravidians brought to Yapanaya by Portuguese.

      • 2
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        Oh! Not you! ……. look, I said “facts and figures” ……. you are the last person to come up with facts & figures …….. just the same silly repetitious mantra would work with the 9.6 …… but not here. :))

        You guys are just sitting ducks! :))))



        Anyway, ………. soreee to have hurt your delicate feelings.

        • 0
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          nimal fernando,
          It is a well-known fact that China gave loans to Sri Lanka to buy arms while the countries who talk about eliminating terrorism tried to stop the military operation against LTTE. If China did not come forward, it would have been difficult to buy arms to fight against LTTE.
          You guys are against China because Sri Lanka managed to get rid of Tamil terrorists with the support received from China.

          • 2
            0

            “China gave loans to Sri Lanka to buy arms”

            SL wouldn’t have needed loans if Gota and the Rajapakses did not steal all the money the country had to buy arms …… with MIG deals etc! :)) ……… talk about sitting ducks!!!

            Fonseka had to get shells from his contacts in Pakistan form his military school days there ……. because Gota had pilfered all the money importing useless crap to pocket the commissions. :))

            If you can’t do a better job of defending the Rajapakses ……. return their money; they deserve better! :))

            You are just pathetic ….. don’t waste my precious time if you have nothing new to say.

  • 5
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    Prof Kumar David,

    US and China are partners in international trade whether they are in No 1 or No 2 in economic terms.

    You have not taken account of the military might of US into your economic equation where No 1 position of US could not be challenged by China in the near future..

    When you look at the total picture rationally and objectively, taking account of all relevant parameters, the results may be quite different.

    • 2
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      Exactly, US military power plays a part in USD being global currency and it is one of the parameter.

  • 2
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    Whilst this is a good view point, practically there are so many hurdles against DY or FY (fiat Yuan) becoming global currency.

    USD emerged as global currency through series of historical financial catastrophic and gradual defaults and meltdowns of other States, wars, surrogating as currency for other States through their financial crisis and calamities etc.

    At the same time US was growing as the military super power and of course political super power as well.

    In the Cold war, whilst physically subduing Soviet Union was a victory, the bigger and permanent win is that US has the winning of other peoples’ and States’ heart and mind over the idea of democratic capitalist system.

    One other very important behaviour of the US is that US has so far, never defaulted in its internal or external debt obligations, even when the currency was pegged against gold reserves.

    This has lead USD to the status of most trusted currency in the world.

    The next global currency status will also be determined along side the war for winning ideas including idea of trust, which is already being fought in several fairly obvious (technology etc.) and murky fronts (China’s debt trap etc.).

    China’s brain power (ideas) is also limited to Chinese thinking, where as US has so many diverse options in this front by having immigration. It is mainly not brain-and-thinking numbers game.

  • 2
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    Truly very worried about the contents of this article. I think the beginning of the arms trade by US may be part of the domination of the dollar and domination of the world, not forgetting dollar connected to petrol.With respect to control of world’s arms trade the war in Vietnam was a showcase where Howard Hughes corporation was taken over.perhaps linked to their buddies in Israel.
    Mark my word that Israel is far too advanced, very closely linked to US where perhaps their secured work houses are until whole of Palestine is conquered and controlled. This could be the reason why the US politicians are not will to criticise Israel for the latest incidents in Palestine.They might dominate all the cyber technology that will lead strengthening the dollar or make it stable even if the renewable energy is a threat to the stability of the dollar. With US dominating the world’s debit card, credit card, SWIFT system will not allow china to dominate the world’s trade with their DY.I think the ultimate winner will be Israel as they are far ahead of technology,perhaps the best weapons systems built in US and no doubt China and even Russia will match it.

    • 2
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      Think of the people who are winning out of the pandemic, the trading even a pizza is done on line while the established local business are going under.
      Global warming and Islamic extrimisum is on the rise and I sincerely home all these compreting powers could workto gether and tackle it for our future generation on this planet.

      Sorry I presented the above without correcting the grammar, must have pressed the wrong key. .

  • 1
    0

    Good article, Kumar, with as much guidance as possible, based on history, anecdotal activity and current realisation that is triggering initiatives such as the digital Yuan.

    Biden accuses China of “eating our lunch”…… poor sod hasn’t realised that China was given US’ lunch on a plate, and they are being far, far more strategic with spreading the products of digestion around; the Belt & Road thingy being one, with poor Lanka being caught in the middle being prostituted, by the double Pakse pimps, whose only strategy is to avoid prosecution and enrich the next five generations.

    US$ hegemony has passed its sell-by date for sure, and major changes are in the offing.

    Anyone interested in knowing more, please get yourself a copy of this book (available on Kindle for download for us poor Lankan sods), pour yourself a large glass of scotch, and enjoy the read: https://www.amazon.com/Mr-Interviews-Fictional-Sovereign-Creditor/dp/1947937103/ref=sr_1_1?dchild=1&keywords=The+Mr.+X+Interviews+Volume+1&qid=1621829617&s=books&sr=1-1

    • 0
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      Easton Scott,
      Not so sure about China’s strategic involvement in countries. Many are in debt traps and can’t pay back. Hence the rush to create alternate currency via DY via Port City. Major war will break out as West will not want to be crippled by unnatural condition of China.

  • 2
    2

    “For example, the US sanctioned Iran for refusing to halt its development of potential nuclear weapons and hit Russia with trade embargoes for invading Crimea and the crisis in the Ukraine. “
    *
    Ukraine had a referendum in which the people voted overwhelmingly to return to Russia where they truly belonged, if not for the folly of Nikita K.
    Where was the invasion?
    *
    The US facilitated a coup in the Ukraine and brought to power neofascists. The anti-Russian feeling whipped up in Ukraine made predominantly Russian East Ukraine seek secession. Ukraine, led by the nose by the USA, created problems for itself. There is not a Russian soldier in the east Ukraine provinces.
    *
    The crisis was made in USA like that in Afghanistan and elsewhere.

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