By Godfree Roberts from his newsletter
This week we focus mainly on China’s development and business.
We still see signs of an unrestricted and type of unformed war on China that is described by many names, examples cold war or, hybrid war. The main characteristic of this war is where nothing that disrupts the enemy is off limits.
Despite an unprecedented downturn in US-China relations during a pandemic, US businesses are not leaving the China market. This was a major finding of an annual survey of members released today by the US-China Business Council (USCBC), a trade group representing more than 200 businesses, many of them global brands with decades of China experience. https://www.uschina.org/media/press/pandemic-and-politics-aside-us-china-trade-ties-continue
Extracts from Here Comes China
Excellent overview – How Did China Succeed? | Joseph E. Stiglitz on China’s Economic System
Although Stiglitz is a world banker, he holds different views from the trademark, neoliberal Washington consensus, specifically an economic ideology holding that while people should own the value they produce themselves, economic value derived from land (including all natural resources and natural opportunities) should belong equally to all members of society. His wide overview here on the growth of China makes sense and is easy listening.
China’s central bank has taken the lead in digital currencies. What does it mean for businesses? by Jemma Xu and Dan Prud’homme
Outside China, digital currencies are fraught with incredible risk. In this void, China’s Digital Currency Electronic Payments offers the public confidence unobtainable by private digital currencies. DCEP is itself a stablecoin, but one backed 1:1 by the PBoC with fiat Chinese yuan/renminbi. Its system follows a “two layer” approach. First, and critically, because it is a sovereign digital currency, the PBoC is the only issuing party. Second, to expeditiously diffuse the currency, the central bank issues DCEP to select retail banks and non-financial institutions (e.g., Alibaba, Tencent, and Union Pay) in China with strong pre-existing mobile payment networks, who then merely distribute the currency to the general public. Businesses across China will be required by law to accept DCEP as payment.
Besides the regulatory legitimacy, many factors position DCEP to become the world’s most widely used digital currency:
- the Chinese state’s track record of rapid institutional innovation;
- Chinese public support of institutional experimentation;
- Chinese firms’ strong competitiveness in digital ecosystems and
- capabilities to quickly adapt to changing technological paradigms and institutions;
- a massive Chinese population who quickly adopts new digital technologies, and
- lead the world in adopting mobile payment applications.
Although central banks in several other countries have also been studying digital currencies, none have taken the lead to actually develop and rollout a CBDC at the scale occurring in China. DCEP will be used for purchases in all sectors across the country. To start, as of mid-2020, DCEP has been piloted in the Chinese cities of Shenzhen, Chengdu, Suzhou and Xiong’an – potentially reaching over 42 million people, more than Canada’s entire population. Elsewhere in China, DCEP is already in the process of being piloted in the restaurant and hospitality sectors, with foreign multinationals such as McDonald’s, Starbucks, and Subway already signing up to participate. Further, DCEP trials are already being conducted around China to reimburse public sector employees’ travel costs. Yet other pilot initiatives, such as a commitment to use DCEP at venues for large-scale upcoming events in Beijing, are in place.
Meanwhile, the Chinese government recently proposed the creation of a regional digital currency backed by the Chinese RMB/yuan, Japanese yen, South Korean won, and Hong Kong dollar – with DCEP at the centre. And China’s multi-trillion dollar Belt and Road Initiative (BRI) offers a network to extend DCEP in countries around the globe.
Businesses should prepare for DCEP’s rollout in two main ways. First, they must ensure that they have appropriate infrastructure in place to accommodate DCEP, such as digital wallets. Contracts with third-party financial custodians can also be helpful. On the upside, to facilitate swift legal compliance with DCEP – considering that its acceptance is being required by law in China – the Chinese authorities may integrate DCEP with popular existing digital wallets already widely used by many businesses in China, namely Alipay and Wechat Pay.
Second, businesses may need to explore interoperability options when conducting cross-border trade. Such action may be needed in the longer term if DCEP leads to an alternative international payments system vis-à-vis the current US-led system, which is a probable prospect.
Meanwhile, firms who timely prepare for China’s DCEP rollout can seize several significant opportunities. First, as previously alluded to, the expansion of DCEP will facilitate the internationalisation of the yuan/renminbi. In doing so, the Chinese currency will provide a strong alternative institution to rival the current USD-dominated international payments system.
Third, by facilitating direct transactions between digital wallets, DCEP will eliminate sizeable banking clearing and settlements costs. In other words, ‘payment is settlement’ with no need for separate clearing and settlement processes.
Fourth, DCEP will offer firms new ways of raising capital and secondary trading via the issuance of digital securities and disintermediated trading on exchanges. Digital securities are regulated financial instruments such as equities or bonds where the transaction and shareholder details are recorded on the blockchain ledger. As a stable currency, DCEP will be used to reduce or eliminate the clearing and settlement processes associated with trading digital securities on secondary exchanges. In turn, this will provide firms and investors easier access to digital financial instruments.
Fifth, DCEP’s development will catalyse fintech innovation, giving rise to hybrid products that draw on both traditional markets and digital currencies. Greater numbers of innovative structured products are appearing in the digital currencies market, where the underlying asset is a native digital currency, such as Bitcoin, but the payoffs are based on traditional structured products. DCEP will serve as a reliable alternative underlying-asset in the future, stimulating the creation of more hybrid financial products.
Fifth, and not least, aggregate demand may rise as a result of DCEP’s rollout. DCEP adoption will allow governments to rapidly deploy “helicopter money” to the public without requiring bank accounts. This will empower the previously unbanked to form a new group of consumers.[MORE]
Debt – People criticizing China’s debt see only the debit side of the ledger. If they look at the credit side, they would see offsetting assets. One of those assets is the $20 billion Three Gorges Dam, which generates 100 billion KWh which it sells for US$0.084/KwH, bringing in $8.4 billion every year. Three Gorges tours earn another $3 billion, and flood mitigation and irrigation enhancement save another $3 billion, as the current flooding demonstrates. That’s valuable debt!
China pledged to invest $5.8 billion in the construction of the Moscow-Kazan High Speed Railway. The railway will be extended to China through Kazakhstan. The total cost of the Moscow-Kazan high speed railroad project is $21.4 billion. [MORE]
The Caspian Sea is becoming an alternative to the Suez for shipping between Europe and China, and a great deal of activity is taking place there. Four major Belt & Road routes and one significant Indian route make up the five East-West intersections that the Caspian is shortly to provide, with the potential for a sixth should plans to create a canal between the Caspian and Black Seas come to fruition. [Download Chris Devonshire-Ellis’ Report]
The Port of Beirut poses the biggest geostrategic threat to American power projection because China’s Silk Road is fast creeping towards the docks at Beirut Port. The US, having recently forced Israel to cancel its Haifa rail contract with China, has dampened the Chinese advance in the eastern Mediterranean, and what remains now in the path of the US is the Beirut Port. The US must either invade it to block the Chinese geostrategic mission creep, or else destroy it.[MORE]
See everyone next week for the regular Here Comes China newsletter. It is a pleasure to work with Godfree and to collate the main points for The Saker Blog.