A new threat to the US dollar's dominance - and the current world economic system?

 

The iconoclastic Fred Reed has some interesting thoughts on the new Chinese digital currency initiative - ones that, if correct, spell real trouble for the US dollar's current dominance of world trade.  Like Mr. Reed, I'm not an international economist, but I'm a practical realist, and I can see the potential for currency disruption as well as he can.

Here's the beginning of his article.

Normally I write about things I know. In the case of digital currencies, and in particular the digital yuan (hereinafter dijjywan) I write about something that piques my curiosity. So little seems to be known that it is difficult to find anything definitive. Yet the question is so important, digital currencies so new, the implications so sweeping, that discussion seems a good idea. The following therefore is a sort of declarative question, a listing of ideas from many sources, perhaps wrong in many cases, about which I hope readers can enlighten me. To avoid endless qualifications and caveats, I write affirmatively things that I don’t really know. Correction and thoughts welcome.

Some things to know: The dijjywan, being rolled out in the Winter Olympics, is not a cryptocurrency like Bitcoin, intended to maintain anonymity of users: all transactions are or can be known to Beijing. A dijjywan account is not a bank account, though it is administered by PBOC, the People’s Bank of China. You don’t need to have a bank account to use it. It does not earn interest. You cannot speculate in dijjywan any more than you can with normal yuan, because the digital yuan is the normal yuan, but in digital form. A dijjywan account does not provide access to credit. It is as close to being physical currency as you can get without being physical currency. Transactions are instantaneous and final.

So how does it work? As an individual, you will download an app that China calls a digital wallet to your cellphone, as you would any app. This is currently being done in China. You do a face scan and the system gives you a unique QR code. You now have a dijjywan account. No bureaucracy, filling out of forms, demands for identification, or examination of financial history. There is nothing new or Star Wars about this. Everyone in China has already done it to use WeChat Pay or Alipay. Some eighty percent of retail transactions in China are made by cellphone app, making acceptance there likely.

Suppose that you are in Kathmandu and I am in Cancun and you want to send me five hundred dijjywan. You call up the app, go to contacts, tap Fred, type in 500, and hit send. Five seconds later in Mexico, I have the money. (I made that up, but it is close to payments I have seen made in Chengdu.) For practical purposes instantaneous, no bureaucracy.

Interesting question: What would easy, convenient, fast transfer of funds by cellphone do to Western Union? What would it do to debit cards from Mastercard and Visa? American credit-card companies get a percentage of every sale. If China, as a tactic of economic warfare, did not take a rake-off or took a smaller one, what would this do to Visa and Mastercard? Merchants would certainly favor a system that cost them less.

When China goes cashless with the dijjywan, which is its stated intention, it will improve efficiency within China but have no great effect in the outside world. Who outside of China would want to use a Chinese digital currency?

Perhaps lots of people. There being many Chinese tourists in Cancun, hotels and restaurants would like to grab business from Chinese who didn’t want to bother with currency conversion. Mexico likely would be happy to have the money come into the country. People in Zimbabwe, whose currency is worthless anywhere else, and who might worry that Harare would start printing money and destroy their savings, would be happy with dijjywan that could be taken out of the country or spent internationally online. Such a nation, if it wanted a stable currency, might make the dijjywan the national currency, or a national currency, as Panama and Ecuador do with the dollar. People without bank accounts, estimated at two billion, would find it useful. The result would be a distributed all-yuan Sinocentric financial ecosystem.

There's much more at the link, including more examples of how the "dijjywan" might disrupt the current international financial system, including bypassing the SWIFT international currency transfer system altogether.  It's very thought-provoking.

Also of immediate importance is the rapid weakening of the US dollar against other currencies, due to the rampant (I'd say out-of-control) issuance of new dollars (as discussed in these pages recently), to the point where inflation - even hyper-inflation - is a major threat.  A new, freely available and freely convertible international digital currency might be perfectly positioned to take advantage of the dollar's current weakness, and capitalize upon it.

Of course, if Mr. Reed's speculations prove correct, one can't expect Western governments and financial institutions to roll over and play dead.  They'd fight back in many ways to retain their place in the fiscal sun - but could they succeed?  Has enough economic power already passed from the West to the East that China could defy their objections and steamroller its new system over existing ones?

I was still unsure of the implications of Mr. Reed's article, so I researched the topic more widely.  Quoth The Raven, an economics newsletter, speculated recently that China could make their digital yuan gold-backed, which would be an even bigger disruptor to international finance.

Make no doubt about it: China has lofty goals for itself. Anyone who thinks that China isn’t eventually aiming to be the world’s biggest military and economic superpower hasn’t been paying attention. But, due to their penchant for working patiently and quietly over long periods of time, this may not be evident to many Americans, who often times need to be bludgeoned over the head with a conclusion before “arriving at it on their own”.

China thinks in terms of generations and centuries. They are officially playing the long game. And don’t let the lack of a hot war fool you, the gears and wheels of trying to advance their country’s interests are there, grinding away slowly behind the scenes, for those who care to peek behind the curtain.

. . .

China looks to be clearing the way for its digital currency, regardless of whether or not it is going to be backed by anything. The digital Yuan is no longer a concept, it is being tested in reality and will soon be implemented.

A big part of clearing the way for the digital Yuan (and a potentially gold-backed version) is getting competitors out of the way. This means Bitcoin. China has been notoriously hawkish on Bitcoin as of late, with some speculating it is to make room for their digital Yuan ... One analyst predicts a 50% chance that China will ban bitcoin outright.

With bitcoin out of the way, the focus domestically would have to turn to gold: keeping it in reserve, transacting it, making it synonymous with value domestically.

Again, more at the link.

QTR linked to an article in the South China Morning Post, which might as well be a hot-line to the thinking of the Chinese Communist Party and that nation's government about how they're thinking.  It's titled "How China’s digital currency will thwart US dollar trap and help the world".  Here are a few excerpts.

As its transactions are instant and transnational, the digital currency would be attractive for international trade settlements with China, including projects in the digital Silk Road of the Belt and Road Initiative.

. . .

What is more, the digital currency does not depend on the US-controlled Society for Worldwide Interbank Financial Telecommunication (Swift) banking system. It is thus immune to dollar-based US sanctions.

. . .

While the United States and Western allies are not about to warm to China’s digital currency any time soon, more countries in Asia, Africa and Latin America are likely to embrace the convenience and opportunities of China’s digital payment systems, made even easier and safer by its sovereign digital currency. This trend is likely to accelerate with the commencement of the Regional Comprehensive Economic Partnership, comprising a third of the world’s population and a third of world GDP.

The developing world accounted for 49 per cent of world GDP in 2010 and is expected to reach 60 per cent by 2030. Thus China’s growing global integration augurs well for the widespread acceptance of its sovereign digital currency, which would speed up the internationalisation of the renminbi.

. . .

China’s digital sovereign currency is now poised to mitigate the dollar trap, accelerate internationalisation of the renminbi and offer an escape route from dollar-based sanctions.

More at the link.

It certainly looks like Mr. Reed was on to something with his speculation.  This has crept up almost unnoticed by many private citizens such as you and I, but it has the potential to radically change the way in which we do business, even as US consumers.  Just imagine for a moment what might happen if regular US citizens and residents can open an account in China denominated in digital yuan.  We could use it to buy goods from a Chinese version of Amazon.com, have them shipped to us (assuming shipping improves from its current logjam), and take delivery of them at our homes, all without a single dollar or cent being paid to US merchants, banks or transaction processors.  What would that do to the US consumer economy, or Europe's, or anywhere else's?  What happens when an African farmer can open a digital yuan account in China, use it to order fertilizer from a company in, say, Brazil, and have it delivered across the South Atlantic to his doorstep, all without any government permission or intervention?  Can you say "destabilizing influence"?  I figured you could . . .

Mr. Reed concludes his article:

American officials often say complacently that the yuan accounts for only a small percentage of international commerce and that the dijjywan is no threat to the dollar’s hegemony. Perhaps. But the world’s economic and technological center of gravity is moving to the east, a market as huge as China’s has persuasive powers all of its own, many countries want to avoid American domination, and the digital yuan is something entirely new. I don’t think anyone really knows what effects we will see.

I think he puts the dilemma very well.  What next, I wonder?

Peter