February 25, 2021 | The Future of China’s Digital Currency: Expanding Central Control of Monetary Policy
The Future of China’s Digital Currency: Expanding Central Control of Monetary Policy
The Future of China’s Digital Currency: Expanding Central Control of Monetary Policy
In 2018, I attended a conference where a hedge fund manager named Erik Townsend gave a talk on the future impact of digital currency on the global economy. Townsend’s speech captivated the entire conference hall, and he introduced a series of ideas that have stuck with me until now: that the future of money would be a government-backed, central-bank-issued digital currency that would have little resemblance to the decentralized world of blockchain.
Townsend, who wrote a book on this subject that I recommend, did not paint a flattering picture of what a world dominated by government-backed digital currencies would look like. Firstly, he made it clear that the first government-backed digital currency would not be tradeable, and it would not be decentralized, and it would not be Bitcoin. The first government-backed digital currency would be tightly controlled and monitored by its issuer, its sovereign central bank.
Townsend outlined several plausible scenarios for how such a government-backed digital currency would impact monetary systems.
A central bank could use this digital currency as a macroprudential tool to provide government authorities with an unprecedented ability to monitor and direct capital flows within a particular monetary jurisdiction. Money laundering would become a thing of the past as it would be impossible (and presumably illegal) to conduct any transactions outside of the centrally monitored permissioned ledger.
Beyond monitoring, a central government could directly control the spending and borrowing behavior of all banks, corporations, and individuals down to the most granular levels. Central authorities would effectively ‘program’ the digital currency to only be spendable on certain goods and services at certain times. Monetary authorities could also block individuals from buying certain goods and services at the flip of a switch. Moreover, to encourage consumer spending and discourage saving, a central government could also set a ‘timer’ on the digital currency to disappear from a consumer’s digital wallet if not spent before a pre-determined expiration date. Townsend’s talk completely changed my understanding of central banking and money itself.
I’m reflecting on Townsend’s speech from 2018 because the future has seemingly already arrived. A currency with the potential to embody all of the aforementioned capabilities already exists in the form of China’s DCEP, also known as the Digital Yuan.
Whether the aforementioned scenario represents a dystopian future or an advanced monetary policy breakthrough is a subjective value judgment. However, China is not bogged down by this debate and is already rolling out DCEP domestically, albeit slowly. China has already started testing DCEP in cities such as Suzhou and Shenzhen. China is also experimenting with cross-border DCEP transactions by initiating tests in Thailand, the United Arab Emirates, and Hong Kong. For more background on the internationalization of DCEP, I recommend Harrison Dent’s paper titled International Trade Law Concerns With China’s Digital Currency: How Sovereign-issued Stablecoin Can Destabilize International Trade.
Whether this new form of digital monetary policy infringes on personal privacy and conceptions of freedom will be a point of discussion in the west. This debate will not likely exist in China, although I can already sense the west beginning to latch on to some of the more simplistic surveillance state narratives.
Although DCEP’s initial rollout period will be slow and limited to a few test cities, a country-wide rollout is inevitable. When the time comes, a mass rollout likely won’t be that noticeable given the prevalence of digital payments in China. China’s government can already monitor all transactions within China's digital payment platforms anyway.
I still have questions and components of DCEP that I don’t understand very well. For instance, it’s not clear to me how DCEP will interface with Alipay and WeChat pay. Martin Chorzempa of the Peterson Institute of International Economics (PIIE) believes DCEP will be a direct competitor with the dominant digital payment platforms WeChat Pay and Alipay. I’ve confirmed with folks in China’s banking industry who agree that this will be the case for a period.
For me, this is an ongoing exploration, and I hope to receive your feedback and advice on China’s digital currency.
US-China Trade
Executive Order on America’s Supply Chains
The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security. Pandemics and other biological threats, cyber-attacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition, and other conditions can reduce critical manufacturing capacity and the availability and integrity of critical goods, products, and services. Resilient American supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs. They will also support small businesses, promote prosperity, advance the fight against climate change, and encourage economic growth in communities of color and economically distressed areas.
China Says Biden Bid to Shift U.S. Supply Chains Unrealistic
China dismissed efforts to shift U.S. supply chains toward alternative sources as unrealistic, hitting back hours after President Joe Biden signed an order to review how America buys strategic goods.
Chinese Foreign Ministry spokesman Zhao Lijian made the remarks Thursday in response to a question about the order, which will cover chips along with large-capacity batteries, pharmaceuticals and critical minerals and strategic materials like rare earths. Zhao said such measures “will not help solve domestic problems” and only harm global trade.
“China believes that artificial efforts to shift these chains and to decouple is not realistic,” Zhao told a regular news briefing in Beijing. “We hope the U.S. will earnestly respect market laws and free trade rules and uphold the safety and reliability and stability of global supply chains.”
China Technology
China Outspends Rest of the World on 5G Infrastructure By 2-to-1
Analysts told Caixin that China’s dominant position in 5G owes to Beijing’s strong focus on the technology and its ability to execute plans through its state ownership of many key sector players, including the nation’s big three wireless carriers. They added its strong position is likely to continue, though its share of the global market will fall gradually as other countries step up construction.
How American Free Trade Can Outdo China
President Biden’s announcement that America is back—ready to engage in the diplomacy that has been a hallmark of our leadership for generations—was music to the ears of those who believe U.S. leadership is essential to global order. Unfortunately, trade didn’t make the cut when the president outlined diplomatic priorities. This merits rethinking.
The U.S. and China are engaged in a strategic competition that will determine the shape of global politics this century. But when it comes to trade, a critical dimension of that competition, America is ceding the field.
Additional Resources, Notes, and Reading:
Scar Literature by Sabina Knight
This video tells the story of “Scar Literature,” a gut-wrenching literary movement that bravely confronted the wounds of China’s Cultural Revolution. Dozens of evocative images illustrate the movement’s significance, its key stories and their historical contexts. The video invites viewers to consider Scar Literature’s legacy for healing trauma in China and beyond.
Thanks for reading, see you tomorrow!
Kevin
Photo by Tamara Bitter on Unsplash
Great thoughts, I'm really interested in following the digital yuan trends in Suzhou and Shenzhen. Thanks for sharing Kevin!