The Chinese currency war

Ask someone what they think the biggest brand in the world is, and you’ll get the classic answers from Coca-Cola to Apple to Google and then you might get a more thoughtful response like Jesus Christ.

Personally, I put the US dollar as the world’s biggest brand. It doesn’t matter if you’re a Christian, Muslim, or atheist, it’s something every person and country believes in.

It’s a rare brand indeed when your enemies will choose to hold it as a form of safekeeping – when Saddam Hussein himself was pulled from a hole he had a backpack filled with USD.

The coronavirus has created many strategic forks and accelerations in our economy. The 'work from anywhere' movement was a slow burn – now many of the world’s biggest companies have announced their staff can work from anywhere, forever – an impact we’ll see bubble up in commercial real estate portfolios.

We’ve also seen things fork into new trajectories such as COVID safe supply chains and retail and entertainment requiring social distance.

But there is one development which is both simultaneously an accelerant and a fork, the emergence of a new kind of fiat currency – an official Chinese digital yuan. This could permanently restructure the relationship between money, economic power, and geopolitics.

But before we get into the depths and repercussions of the Chinese move, let’s take a crash course in the history of currency.

Here’s an easy fact which is easy to forget: Currency is a form of technology.

Just like all technology, if an improved method comes along, there is a very good chance it will substitute what people were using beforehand. While it might not replace the alternatives entirely, at a minimum it will sit atop what is already being used – another layer on the technology stack. It is also worth remembering that new forms of currency have often arrived in concert with new eras of technology.

• Commodity money such as Cowry Shells arrived with Barter Economies.
• Grain Receipts, during the Agricultural Era.
• Ferris Coins, during the Iron Age.
• Bills of Exchange, during the Age of Discovery.
• Fiat Currency, during the Industrial Revolution.

Now that we’ve entered the digital age, it is inevitable that digital currency will emerge and gain mass adoption.

The official Chinese digital yuan has been more than five years in the making and is now in pilot runs to slowly start replacing their physical legal tender.

If the experiment succeeds – and I believe it will due to the Chinese government's authoritarian proclivities – this new cash, with a fixed valuation to the banknotes bearing Mao Zedong’s image, will become the world’s first sovereign token to reside exclusively in the cyberspace.

Pilots are currently happening in Xiong’an, a satellite city of Beijing, and they include coffee shops, fast food, retailers, theaters and bookstores, The other trials are reserved for Chengdu and Shenzhen.

The trials are taking place just as tensions are rising and trade relations are strained as countries the world over look to apportion blame with the pandemic.

For those paying attention, the launch of the currency has come at a time when consumer psychology is ripe for change. In times of great fear, economic participants have a habit of saying yes to controls which have long term effects on freedoms and suit the ideas of the ruling class.

The big question though is will this shift to a digital currency challenge the dollar and become the economic fulcrum the Middle Kingdom has been looking for? Will it allow China to gain financial supremacy to match their production supremacy?

Whether or not that is the case, there are also a cadre of simple internal economic benefits from the move.

Chinese consumers have embraced mobile payment apps, to a greater degree than any nation-state.

Their smartphone penetration sits above 60 per cent, and the cash intensity of the economy is now below 5 per cent (that is the ratio of cash to digital currency in circulation), rivalled only by Sweden.

In 2020, mobile is greater than paper - the prominence of Alipay and WeChat has resulted in more than 80 per cent of transactions occurring on phones. From Shanghai to Shenzhen, the card has become a discarded piece of superfluous plastic.

The digital yuan is being pushed out to consumers through China's big banks – a move which could also restore a missing balance to regulate unfettered fintech growth.

If anything, we should also regard this as a move other sovereign nations should pay heed to. As currency evolves into digital forms, maintaining a modern currency infrastructure which maintains fiduciary control will be vital.

Facebook’s Libra Foundation and proposed stable coin comes to mind. The push back on Facebook’s goals to launch their own currency from developed nations has been telling. While the Libra consortium may only be hanging on by a thread, it doesn’t thwart the need of nations to innovate in the financial meta-structure, as China has done. A first-mover advantage which could tip the global trade balance.

There is nothing more powerful for any nation than for others to desire its currency, like a premium brand – especially given a currency’s ‘production costs’ are negligible. Unless other countries react, the digital yuan could find customers overseas, especially as China continues its belt-and-road investments.

In addition, China will have a global advantage in being able to study in real-time the effects of its COVID based stimulus activities in the trial regions of the economy. This could become critical to a financial recovery if the economy splutters for an elongated period of time.

In real terms, this could spell the end of anonymous spending in China, something most government authorities and businesses the world over would welcome. Like many cryptocurrencies, transactions will be stored widely on distributed ledgers, but do so more quickly than other cryptos such as bitcoin

The future of currency is clear, it’s digital. What isn’t clear is how quickly western nations will react and develop their own digital and crypto versions of their nation-states.

US-c or maybe an AU-c? First-mover advantages could be significant as commodities such as currency tend to act in layers, and category winners form a natural trading monopoly – one which the US might unwittingly be handing over, and if that happens, the US could end up being the shortest empire in history.