China’s central bank (The People’s Bank of China – PBOC) has recently announced it is to launch a trial of a new digital currency with 19 retail firms, including US owned Starbucks, Subway and McDonald’s.
Whilst most stocks have been plummeting amidst the coronavirus meltdown, there were a group of stocks on China’s main exchange for digital currency firms that moved so significantly they triggered automatic execution points to halt trading. Trading was suspended not as a result of these stocks falling, it was because they soared. News that the PBOC said testing will be conducted in four cities; Chengdu, Shenzhen, Suzhou, Xiong’an, clearly had investors excited.
This came after screenshots of a digital currency wallet built by the Chinese state-owned Agricultural Bank of China had been circulating widely online and Alipay, the financial arm of Chinese tech firm Alibaba and owner of WorldFirst, reportedly publicized five patents related to China’s official digital currency from January 21 to March 17.
China Leading the Charge for First Central Bank Digital Currency
After the recent announcement of its digital currency trial, China looks set to be the first country to officially launch a central bank digital currency – exactly as it intended to be back in 2014 when China saw digital currencies as a way of reducing dependence on the US Dollar. Whilst the old adage ‘cash is king’ is still relevant for many countries, the transition to digital transactions is happening fast – particularly in China. Unlike its western counterparts China has skipped the card generation, moving straight from cash to mobile.
The lesser the reliance on cash and the greater the volume of digital transactions in an economy the better placed that country’s reserve bank is to adopt a digital currency. A decade ago the Chinese economy was cash dependent – now cash constitutes for 40% of payments in China.
The development of a central bank digital currency won’t just benefit domestic transfers inside China either. The USD has long reigned supreme in the currency markets. Over 66 countries look to peg their currency to the US dollar (including China), USD is reportedly involved in 90% of all FX transactions and as of Q4 2019, 60% of all foreigm exchange reserves across the globe were in USD. China itself is looking to diversify its reserves to reduce exposure to USD.
Reliance on USD Could Fall
Michael J. Casey, chief content officer at CoinDesk, explains how an international importer and a Chinese exporter could mutually instruct computers in a blockchain transaction to place a renminbi-denominated digital payment as a new way of doing business.”This decentralized escrow system could let foreign businesses strike trade deals without requiring dollars to hedge their exchange rate risk,” said Casey in a recent interview. Making reference to the fact that at the moment most businesses who are trading with China will need to consider hedging against potential downsides of their own currency with USD.
The CEO of Circle, Jeremy Allaire in an interview with CNBC, has also said “This becomes a mechanism by which [the Chinese yuan] can be used in everyday transactions all around the world.” It’s not just the development of its own central bank digital currency either, China is also developing its Blockchain Service Network in a move that could see a payment system that surpasses SWIFT. The greater the volume of payments we see undertaken in renminbi and not USD, the more this will negatively impact USD.
With the US dollar so dominant in the world, opportunities for growth in alternative currencies are rare. Perhaps this is why China has been developing its own digital currency since 2014 and Chairman of the People’s Republic of China, Xi Jinping, re-iterated that the development of blockchain technology should remain a key focus for China. Being the first country to launch its digital currency certainly presents one of these rare opportunities to get ahead. If the federal reserve and other major central banks don’t respond by progressing their own digital currency offering, we could start to see the pendulum swing.
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