China renews its push for an increased global role for the yuan and the coronavirus pandemic may be just what the digital yuan doctor ordered.
In the days leading up to Cliff Askew’s birthday, the 8-year-old was beside himself with anticipation. He’d been waiting for this day for the better part of a whole year.
Cliff didn’t come from a particularly well-off family, but what the Askews lacked in money, they more than made up for in love.
And when their 8-year-old son Cliff, who never really asked for anything his entire life, pleaded with his parents to get him a gaming console for his 9th birthday, the Askews set aside some money each month to buy him one.
For his part, Cliff was a model student, got good grades at school and helped out around the house where he cared for his two younger siblings while his parents were out at work.
So when the morning of his birthday finally arrived, he unceremoniously ripped off the wrapping paper and prepared himself to while away the weekend in endless gaming ecstasy with his friends.
But as Cliff looked at the box, he was stunned speechless.
It was a Nintendo, when what he wanted was a Xbox so that he could play Halo with his friends.
He tried his best not to let the disappointment show, as his loving parents with beaming faces smiled widely.
“Do you like it?”
“Yes,” Cliff stuttered, trying to swallow his emotions.
A few days later, when his mother noticed that Cliff had hardly taken the Nintendo out of the box, let alone play with him, asked,
“Hun, don’t you like your gift? You know it cost your father and me quite a bit of money right?”
“Yes Mom, of course I do. It’s just that what I really wanted was an Xbox.”
“But what’s the difference, you can play the same games on the Nintendo as well right?”
“No you can’t Mom. All my friends are on Xbox and if I want to play with them I need to be on the same platform.”
“Well why didn’t you say so earlier? We can always return it.”
“I just didn’t want to hurt you and Dad.”
Cliff’s Mom smiled a broad smile and was close to tears. For all the struggle of the Askew family, their children were a true blessing.
“Bless your heart, we’ll go bring it back to the store and trade it for what you really want.”
“You mean it Mom? You won’t be mad?”
“How could I be? I understand that you just want to be on the same platform and playing the same games with your friends. I was eight once too you know.”
Because a platform is only as useful as the number of people you can reach on it.
And that’s why China is making a broad push to elevate the status of the yuan internationally.
Cheap Chinese Change
Despite being the world’s second largest economy, the Chinese yuan, according to the Bank of International Settlements, only represents 2% of global transaction volume.
And faced with the growing threat of restricted access to the dollar, Beijing is pushing to get its own people as well as its trading partners to use the yuan instead of the dollar.
As tensions rise with the U.S., China is under increasing pressure to promote the global use of the yuan and over the past few weeks, high profile Chinese figures have been more vocal than ever about such an endeavor.
With almost a trillion dollars in offshore bonds and loans and US$1.1 trillion in state-owned bank liabilities, access to the dollar is vital for both Chinese companies and banks.
And while the U.S. denying China access to the greenback is unlikely — it could potentially do major damage to American interests as well as the global financial system — the mere risk of such retaliation from Washington alone, has been enough to set alarm bells ringing.
The Hong Kong dollar, which until very recently had been a bastion of stability, and key to the autonomous city’s status as a global financial center, has started to waver ever since Beijing instituted a new national security law in the territory.
And with geopolitical tensions growing with the United States, China’s largest trading partner, Beijing desperately needs to find a replacement for the dollar, or forever face financial risks and be subject to the vagaries of Washington.
Changing The Yuan, One Dime At A Time
To be sure, China has gone some ways over the years to make inroads in internationalizing the yuan, winning official reserve-currency status from the International Monetary Fund and launching commodity contracts with select trading partners, priced in yuan, but globally, the yuan is still a bit player.
China has also steadily opened up its financial market to overseas investors, and while this has lured inflows, foreign ownership of mainland stocks and bonds has remained minor.
Part of the reason of course is China’s stringent capital controls which place significant restrictions on transfer of the yuan, but there are hints that while full convertibility will not be immediate, it may occur in time.
Last week Zhou Yongkun, an official at the People’s Bank of China (PBoC), China’s central bank, said that the country will introduce direct trading between the yuan and additional currencies, while remaining coy about which ones.
To truly internationalize the yuan, China would need to pull down its capital controls, which were tightened in the wake of the messy yuan devaluation in 2015, after the Chinese stock market crashed, but to do so would risk destabilizing outflows.
According to Yu Yongding, a former adviser to the People’s Bank of China,
“Yuan globalization is largely hinged on convertibility under capital account — which China is not yet ready for.”
But convertibility may not be so far away, thanks to the PBoC’s digital currency.
While Beijing may be less concerned with foreigners taking money out of the Middle Kingdom, is is far more concerned with locals taking money beyond the Great Wall.
And although the PBoC has assured Chinese citizens that its digital currency will not be used to monitor transactions, the mere potential for it to be used to track money flows can act as a sufficient deterrent for capital flight.
A digital yuan could then provide the platform for Beijing to achieve both its goals for the yuan — convertibility, as well as regulation of potential capital flight.
Currently, most of the Chinese yuan that leaves China flees in the form of notes.
But ever since the coronavirus pandemic, the potential for these notes to be vectors for the coronavirus has allowed the PBoC to recall notes from banks and to otherwise push cash-based transactions to digital ones — the perfect setting for the long term adoption of the digital yuan.
And it’s not just China where a digital yuan may find an audience.
A digital yuan may also find favor in countries in South America which have been hardest hit by the coronavirus pandemic, and which either not want to use, or lack access to, the dollar.
With a surge in coronavirus infections in Argentina, Chile and Colombia, the volume of Bitcoin being traded in these countries also rose dramatically.
As the coronavirus pandemic swept through volatile economies in South America, already heightened geopolitical issues came into sharp relief and the region experienced a sharp spike in Bitcoin trading activity, according to data from LocalBitcoins.com.
But South American governments may be more keen to support a digital yuan instead of Bitcoin, which they have almost no control over.
A digital yuan would also allow countries in South America which face tenuous relations with Washington and are always at risk of facing sanctions, to trade freely with China and other countries, while bypassing the dollar-regime altogether.
Countries like Venezuela, which has been subject to crippling sanctions and is in desperate need of hard currency, may suddenly find the digital yuan an attractive option.
Especially when Chinese regulators are building the China International Payment System to settle transactions outside the dollar-based platforms (like Swift) where Washington holds sway.
If successful, a digital yuan would allow countries less friendly with the United States to trade with each other in a common currency — the digital yuan — without fear of much intervention from Beijing.
Whereas the United States uses its dollar hegemony both as a carrot and a stick to further its political goals, China has shown no desire to effect regime change or meddle in the local politics of its client countries.
Last month, Hong Kong regulators kicked off Wealth Management Connect, which will allow cross-border investments among residents of Hong Kong, Macau and southern China, a move that will boost the yuan’s international use and test capital account opening.
If China seeks to internationalize the yuan, a digital version may be just what the doctor ordered.
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