Get Ready for the Next Game-Changer: the Digital Yuan
The title is a column from Pepe Escobar, strategic-culture.org, May 5, 2020 (Creative Commons w/ attribution) (h/t: open-thread commenters at MoA) Please consider this by way of a PSA, as my grasp of the subject is minimal.
‘A new, radical paradigm shift is in progress. The U.S. economy may shrink as much as 40% in the first semester of 2020. China, already the world’s largest economy by PPP for a few years now, may soon become the world’s largest economy even in exchange rate terms.
The post-Planet Lockdown world – still a hazy mirage – may well need a post-Planet Lockdown currency. And that’s where a serious candidate steps into the fray: the fiat digital yuan.
Last month, the People’s Bank of China (PBOC) confirmed that a group of top banks started trials in electronic payment in four different Chinese regions using the new digital yuan. Yet there’s no timetable yet for the official launch of what is called the Digital Currency Electronic Payment (DCEP).
The man with the plan is PBOC governor Yi Gang. He has confirmed that apart from the trials in Suzhou, Xiong’an, Chengdu and Shenzhen, the PBOC is also testing hypothetical scenarios for the 2022 Winter Olympics.
While DCEP, according to Yi, “has made very good progress,” he insists the PBOC will be “cautious in terms of risk control, especially to study anti money-laundering and ‘know your customer’ requirements to incorporate in the design and system of DCEP.”
DCEP should be interpreted as the road map for China leading to an eventual, even more groundbreaking replacement of the U.S. dollar as the world’s reserve currency. China is already ahead in the digital currency sweepstakes: the sooner DCEP is launched the better to convince the world, especially the Global South, to tag along.
The PBOC is developing the system with four top state-owned banks as well as payment behemoths Tencent and Ant Financial.
A mobile app developed by the Agricultural Bank of China (ABC) is already circulating on WeChat. This is in effect an interface linked to DCEP. Moreover, 19 restaurants and retail establishments including Starbucks, McDonald’s and Subway are part of the pilot testing.
China is advancing fast on the whole digital spectrum. A Blockchain Service Network (BSN) was launched not only for domestic but also for global trade purposes. A large committee is supervising BSN, including executives from the PBOC, Baidu and Tencent, according to the Ministry of Industry and Information Technology (MIIT).
Backed by gold: So what does this all mean?
Well connected banking sources in Hong Kong have told me Beijing is not interested for the yuan to replace the U.S. dollar – for all the interest across the Global South in bypassing it, especially now that the petrodollar is in a coma.
The official Beijing position is that the U.S. dollar should be replaced by an IMF-approved Special Drawing Rights (SDR) basket of currencies (dollar, euro, yuan, yen). That would eliminate the heavy burden of the yuan as the sole reserve currency.
But that may be just a diversionist tactic in an environment of all-out information war. A basket of currencies under the IMF still implies U.S. control – not exactly what China wants.
The meat of the matter is that a digital, sovereign yuan may be backed by gold. That’s not confirmed – yet. Gold could serve as a direct back up; to back bonds; or just lay there as collateral. What’s certain is that once Beijing announces a digital currency backed by gold, it will be like the U.S. dollar being struck by lightning.
Under this new framework, nations won’t need to export more to China than they import so they have enough yuan to trade. And Beijing won’t have to keep printing yuan electronically – and artificially, as in the case of the U.S. dollar – to meet trade demands.
The digital yuan will be effectively backed up by the massive amount of Made in China goods and services – and not by a transoceanic Empire of 800 Bases. And the value of the digital yuan will be decided by the market – as it happens with bitcoin.
This whole process has been years in the making, part of serious discussions started already in the late 2000s inside BRICS summit meetings, especially by Russia and China – the core strategic partnership inside the BRICS.
Considering multiple strategies to progressively bypass the U.S. dollar, starting with bilateral trade in their own currencies, Russia and China, for instance, set up a Russia-Chian RMB Cooperation Fund three years ago.
Beijing’s strategy is carefully calibrated, like playing go long-term. Apart from methodically stockpiling gold in massive quantities (just like Russia) for seven years now, Beijing has been campaigning for a wider use of SDR (Special Drawing Rights) while making sure to not position the yuan as a strategic competitor.
But now the post-Planet Lockdown environment is shaping up as ideal for Beijing to make a move. Even before the onset of the Covid-19 crisis the predominant feeling among the leadership was that China is under a full spectrum attack by the United States government. Hybrid War already reaching fever pitch implies bilateral relations will only get worse, not better.
So when we have China as the world’s largest economy by both PPP and exchange rate; still the strongest growing major economy, barring the first semester of 2020; productive, innovative, efficient and on track to reach a higher technological level with the Made in China 2025 program; and capable of winning the “people’s war” against Covid-19 in record time, all the necessary elements seem to be in place.
But then, there’s soft power. Beijing needs to have the Global South on its side. The United States government knows it very well; no wonder the current hysteria is all about demonizing China as “guilty” on all – unproved – counts of fostering and lying about Covid-19.
An “impeding arrival”
A key advantage of a sovereign digital yuan is that Beijing does not need to float a paper yuan – which by the way is being sidelined all across China itself, as virtually everyone is switching to electronic payment.
The digital yuan, using blockchain technology, will automatically float – thus bypassing the U.S.-controlled global financialized casino.
The amount of sovereign digital currency is fixed. That in itself eliminates a plague: quantitative easing (QE), as in helicopter money. And that leaves the sovereign digital currency as the preferred medium for trade, with currency transfers unimpeded by geography and, the icing on the cake, without banks charging outrageous fees as intermediaries.
Of course there will be pushback. As in non-stop demonization of neo-Orwellian China for straying away from the whole purpose of bitcoin and cryptocurrencies – which is to have freedom from a centralized structure via decentralized ownership. There will be howls of horror at the PBOC potentially capable of seizing anyone’s digital funds or turning off a wallet if the owner displeases the CCP.
China is on it, but the U.S., UK, Russia and India are also on their way to launch their own crypto-currencies. For obvious reasons, the Bank of International Settlements (BIS), the Central Bank of Central Banks, is very much aware that the future is now. Their research with over 50 Central Banks is unmistakable: we are facing an “impeding arrival”. But who will take the Biggest Prize?’
I’ll add add this comment cum opinion from Grieved @ MoA:
‘By tomorrow you will have seen Escobar’s latest, on the Game-Changing Digital Yuan – maybe already have (apologies, I have no time to study the threads lately). He reports that it will float from the beginning (even if it perhaps some day in some way becomes tied to gold – because gold of course floats, as does bitcoin for that matter; which is to say that market competition discovers its current price/value).
The point is that the digital Yuan will have scarcity, says Escobar – and this is the quality that MadMax2 cites as the key element of any viable currency. I agree with all this. There will be a fixed quantity of this currency, and that quantity will be known. Note that the new Blockchain Service Network launched by China (and available globally) will serve as the underlying technology.
Your qualms about digital currencies not having tangible existence are unfounded: all digital creations on a blockchain have not only tangible but indestructible existence – that’s the purpose of the blockchain, to keep all histories auditably coherent, from past to present to future.
What follows is my view, for what it’s worth
This digital Yuan will become fiat currency – which simply means it becomes legal tender by diktat of the state. Bitcoin could become fiat in any society that declares it legal tender. That’s all that fiat means. The question of the value of a currency is not answered by whether it is forced to be tender, but by whether its quantity is known.
When the quantity of a medium of exchange is known, then it can be used as a measure of value, which means it actually works as a reliable medium of exchange, and also as a result it then becomes a reliable store of value. It’s only when the quantity of money is not known by the market, or changes in ways not obvious to the people using it to buy and sell things, that its ability to measure value becomes arbitrary, and price discovery is lost. If the number of inch-markings on a yardstick changes, that yardstick is no longer reliable to measure inches with.
It is only a coincidence that fiat currencies not redeemable in some other commodity (such as gold) have the ability to be expanded in quantity – that expandability is NOT intrinsically a feature of its fiat nature, but of its lack of fixed quantity. Fiat currency can be tied to gold and still be fiat, but held to a very stable measurement of value by the very slow-moving change in the volume of gold in the world. If the currency’s volume changes while gold’s remains relatively stable, then the currency’s value changes to match.
And finally, as Prof Werner shows, if you increase the volume of money but use it to create new wealth for that money to buy, the values of things are not upset, and there is no price inflation. It’s as if you increased the number of inches on the yardstick but made the yardstick longer at the same time, and called it the new yard, and perhaps even end up making things bigger, perhaps even for the same old price.
Some very interesting displays of economic textbook basics are going to occur as China proceeds with its various instruments and platforms.
So the IMF’s Special Drawing Right (SDR) will become the new world settlement currency, as the world has long known and expected, and has been no secret for many years now. The Yuan will be a member of the SDR currency, along with the USD and others. China doesn’t want to be the world’s reserve currency.
The USD will not “crash” but float against world events, and against the SDR, the Yuan (and eventually gold if the Yuan becomes redeemable in gold), and against everything else. But when the SDR takes over, all existing currencies will get priced against it – this is where Max Keiser is saying in the latest Renegade show that $100 Trillion of new liquidity will come into the global economy, and all existing debt will be absorbed into it. Jim Rickards said this a few years ago on a Keiser show, and it rings true.
As to what currencies and instruments gain in value through this reset, and what gets down-valued, this will all derive from, and reveal to us watching, the structures of power in the world.
The tendency of capitalism for power and capital to consolidate will continue unabated. The very richest will get richer, at the expense of all others including many who thought themselves rich. Nothing in the system will change, because nothing exists in the system capable of change. Change will cone from outside the system, in the form of geo-physical rebellion by planet Earth, and revolution by its earthlings against the power at the top. But the time scale for this seems quite long to me.’
‘Turbocharging’ exodus: US beats trade war drums to remove supply chains out of China, 4 May, 2020, RT.com
“When the trade war showed no signs of abating last year and the US and China were still hitting each other with tariffs, another AmCham poll showed that the punitive measures were hurting US businesses operating in China. While over forty percent of the 250 respondents were “considering or have relocated” production facilities outside China, some 35 percent of companies said they would rather source within China and target the domestic market. Fewer than six percent wanted to move or already shifted their factory operations to the US.
Set aside the enormous relocation costs – which the White House has recently pledged to cover should an American company decide to ditch China – there is still another massive hurdle in this plan. China is still the world’s top producer of rare earth metals – the group of elements vital for production of multiple devices, from cell phones to some advanced military gear. Should all the production be moved from China, it could ban exports of these materials. Last year Chinese media said the option was already being mulled by Beijing, and it could consider the drastic measure again if trade war tensions further escalate.”
(cross-posted from Café Babylon)
All that's clear is that the petrodollar is unlikely to remain
the world's reserve currency. Pepe seems to think that the gold-backed "digital Yuan" is the only viable alternative, and doesn't seriously discuss why the "IMF marketbasket" of currencies isn't a workable, probably more acceptable alternative, particularly inside the Eurozone, which together has a larger PPP than both China and the U.S. Then, there is Japan, still a giant player in the Asian and global economies, which is unlikely to willingly give up its own sovereign currency to China. No, if anything, a China-controlled reserve currency, backed by gold or no gold with or without blockchain, is probably the least preferred solution to the collapse of the American Green Back.
thank you for your
well-considered comment and conclusion, amigo.
let me add that gjonsit has a related column up, and he has opinions, although my eyes are failing too far by now to quite discern what they are.
Wow. Thanks for picking up this story, Wendy.
Always on the cutting edge.
I've been trying to get up to speed with this, but caught up in investigating biolabs, instead.
Every time I see the digital currency mentioned, it's always in the context of
Your own views were really in step with the idea of a transition to a new trading currency. Although I don't think that the Digital Yuan has an international role to play. I could be wrong about that. But I liked the way you worked out the semantics of the term "fiat" in the context of the systemic (long term) changes that are actually underway geopolitically.
I feel safe in predicting that a national currency will never again be used as a Trading/Reserve Currency.
I won't list the drawbacks of that old system and the harm it has done to emerging nations. Suffice to say that the world has been there and done that. Furthermore, no intelligent and sane nation with good intentions toward the planet would want their currency to be used that way. In my opinion, a block-chain-based synthetic currency would be the ideal Trading Currency, but only if it is dedicated exclusively to trade. It should be redeemable and available at Settlement Banks the world over, which would function just as they do today. Block-chain technology offers a transparent ledger that stores all past transactions and current accounting — and all new money that is created (mined) is accounted for. Yet, details about the trading partners and trading terms are encrypted so that 'exceptional' nations like the United States, cannot spy on transactions and execute economic war crimes in the form of sanctions or block the trades of their Vichy allies. This will go a long way toward enabling free trade between nations, which is especially important now given the pace of essential economic development.
It is not necessary for a block-chain trading or reserve currency to be redeemed in gold. The cryptocurrency has an open and transparent ledger that confirms all transactions. Settlement banks will exchange into any fiat currency desired. It's all digital, anyway, even gold that is used at that scale. As the importance of the Dollar Hegemon slowly fades away, nations can use currency-swaps to trade. Personally, I do not see a problem using SDRs for large trades. The Settlement banks handle these, as well. Plus, SDRs can be held as reserves. SDRs will be useful and necessary in the transition to a different trading currency.
The Chinese Yuan is already an official Reserve Currency of the IMF and is part of the basket of trading currency that make up the SDRs. China has been very methodical in preparing itself for the future.
There's much to learn here. I'm trying to figure it out, too. But this is one area where complete change is imperative to creating a viable future.
The political system is what it is because the People are who they are. — Plato
oh, my amiga:
this is ALL pepe (and MoA commenter Grieved pinging off Mad Max2, adding more. as i said at the top, i posted it as a PSA due to my small knowledge of the subject.
but you've certainly been thinking it through. 'transparent block-chained synthetic currency for int'l trade as fiat currency', and so on.
the IMF basket of currencies also includes the yen. i've intentionally been staying away for the corona-virus, but will bust thru that firewall a bit in the new diary i've been working on. something and someones of which/whom i actually know something, lol, and am pissed as all giddy-up about.
'bout all i did was add some bolds, Pluto, and try,try,try to learn something.
Max discusses the death of the petrodollar
in this clip. He quotes Putin as saying "digital currency can't be controlled by a government". Max is a big proponent of bitcoin, and claims blockchain takes control out of government hands. I'm no economist, but have suggested for years the way to take down the US is by offering a better universal currency. It is in the 1st 15 min...
The way we've been creating trillions dollars to prop up the market, fracked oil, the banks is bound to make the USD less valuable.
Sure would be nice to see the collapse of empire without a war...just a currency collapse.
Rome still had plenty of silver when their empire fell, but they couldn't smelt it because they had cut all their trees.
Anyway interesting development thanks for telling us about it.
“Until justice rolls down like water and righteousness like a mighty stream.”
Rome had also debased its coins so much they were useless for
I have read the principal reason for the debasement of coin of the realm was the need of the many competing emperors of the era to fund their own private armies. The simplest way to raise money to pay the legions was to issue new Imperial coins, substituting cheap copper for increasingly expensive silver.
Granted, the denuding of the Roman landscape, among other ecological crises, also contributed to the impending fall of the Empire.
great aspirational comment,
but may i ask: is this the episode grieved had mentioned in the OP?
But when the SDR takes over, all existing currencies will get priced against it - this is where Max Keiser is saying in the latest Renegade show that $100 Trillion of new liquidity will come into the global economy, and all existing debt will be absorbed into it
the bolded portion was totally inscrutable to me. i've tried to watch, already have a hegg-ache (don't do videos at all well), and kinda move on with my other project.
Thanks Wendy, very interesting and much to be hoped
for. I have long awaited some sort of BRICS currency to get sufficiently widespread acceptance to enable the various non-absorbed states to go through life free of the USA's arbitrary and imperialist sanctions. In the end, the US ability to unilaterally impose sanctions all comes down to the primacy of the buck, and it is time for it to die.
be well and have a good one
That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --
welcome, sea otter.
for a flash of time INSTEX was touted as a replacement for SWIFT processing, and was designed to help iran be able to purchase enough equipment, avoid sanctions, etc., but...it didn't work out as planned.
but i sure did like this section of pepe's report: