By Jose Miguel Alonso-Trabanco
In terms of GDP, China is nowadays the world’s second-largest economy. Even though the country’s growth has been rather slow during the last few years and despite having to absorb the impact of an increasing trade war with the US, the technological, military, intelligence, diplomatic and financial components of Beijing’s national power are being continuously strengthened as part of a long-range multidimensional grand strategy.
In the field of finance, China has invested considerable resources in the international projection of its influence. For instance, the Asian Infrastructure Investment Bank (AIIB) can be seen an ambitious institutional financial vector that ultimately responds to China’s geopolitical agenda. Furthermore, it must be borne in mind that almost three years ago the Chinese yuan was included in the Special Drawing Rights, the official basket of hard currencies used by the International Monetary Fund. In fact, the IMF specifies that the renminbi is the world’s fifth most used currency when it comes to the denomination of worldwide foreign exchange reserves.
Moreover, according to the Society for World Interbank Financial Telecommunication (SWIFT), the renminbi is the world’s fifth most actively used currency for international payments by value, with a share of 1.99%. Even if its proportional importance is still relatively modest compared to the US dollar, the euro, the pound sterling and the Japanese yen, the renminbi is already ahead of traditionally strong currencies like the Canadian dollar, the Australian dollar, and the Swiss franc.
That means China’s financial Lebensraum has been growing, even though it is still no match for the US dollar. However, Beijing has been seeking alternatives to enhance its global financial position. That is hardly surprising, considering that throughout history, China has been at the forefront of financial innovation. For recent proof, look no further than the Central Bank’s Digital Currency Institute plan to launch a state-backed cryptocurrency. According to open sources, the design of the prototype started back in 2014.
This is a natural move which responds to the increasing importance of digital transactions in countless economic sectors. According to statements made by senior officials from the People’s Bank of China in August 2019, their creation is almost ready to be released, even though there were no comments about a specific timeframe. Although the technical aspects are mostly covered, allegedly some regulatory standards still need to be adjusted.
Nevertheless, the eventual materialization of such project would represent an unprecedented development in the field of digital currencies. Most existing cryptocurrencies – like Bitcoin, Litecoin or Ethereum – are decentralized stateless currencies whose value fluctuates so wildly that they can be regarded as speculative assets. In contrast, Libra – the result of an initiative masterminded by social media company Facebook – would operate as some sort of multilateral derivative, since its value would be calibrated based on a basket of several Western hard currencies.
Another peculiar fact about this is that until recently, Beijing’s actions usually reflected a deep distrust about the world of existing cryptocurrencies. Accordingly, Chinese regulatory agencies have essentially banned financial operations with private cryptocurrencies. Hence, it is logical to assume that China is preparing to enter such an esoteric realm, but only under its own conditions. Actually, the idea of harnessing impersonal forces in order to advance one’s own interests is highly consistent with classical Chinese strategic thinking.
So far, the Chinese project is referred to as the Central Bank Digital Currency (CBDC) and it seems that, instead of competing with the Chinese yuan, it would be organically linked to it in a symbiotic way. In fact, it looks like it is being conceived as a digital parallel counterpart whose circulation would rely on corporate conduits and apps like WeChat –which has more than one billion users – and/or Alipay. In other words, the CBDC will likely operate as a state-supported cryptocurrency rather than as a decentralized currency fully dependent on market forces. Accordingly, there would be no loss of monetary sovereignty (perhaps a similar concern motivates the recent US Federal Reserve attempts to align Libra with the dollar’s might).
Therefore, it is expected that both the paper yuan and its digital twin will strengthen each other, especially now that China needs to cultivate its domestic market as much as possible, due to the establishment of barriers that limit the access of Chinese exports –one of the cornerstones of China’s economic dynamism – to some consumer markets. A wider availability of financial services, offered through digital platforms, could help counter the exclusion of mostly rural Chinese citizens that have been marginalized from the untold levels of prosperity achieved by the country’s leading economic engines, located mainly in coastal areas.
Nevertheless, this monetary platform could also be instrumental in expanding – through cyberspace – the global reach of international Chinese financial circuits through trade partnerships with countries willing to do business with Chinese firms in a way that manages to bypass American dominance in the realm of global finance, a consequence of the US dollar’s hegemonic position. For instance, the CBDC could even play a role in the implementation of the Belt and Road Initiative, a huge project that intends to revive the legendary Silk Road, according to 21st century parameters of international trade and interconnectedness.
Furthermore, the introduction of this digital yuan would facilitate the formulation of monetary policy. The inflow of big data that such systems enable improves decision-making and strategic management capabilities, along with a high degree of situational awareness when it comes to tracking the behavioral patterns and volume of transactions.
It would be mistaken to interpret the CBDC project as a response to Libra. However, Facebook’s vocal campaign to promote its initiative – and the discussion it has sparked in several strategic circles – might have motivated the Chinese to accelerate the execution of their plan, in order to achieve a meaningful competitive edge. In other words, even though Facebook is officially banned in China, Beijing does not want Libra – a currency that, after all, belongs to an American big tech firm – to undermine the geopolitical significance of its own ambitious international financial plans.
Nonetheless, there are still important challenges that will have to be addressed. For instance, the tense political situation that is currently unfolding in Hong Kong is critical, considering that geographical, economic, historical, legal, social and cultural factors have made it a natural world-class financial hub that operates as a gateway between mainland China and global financial circuits. The outcome of said crisis is still unclear but its short-term potential impact on the financial components of Chinese grand strategy should not be underestimated, especially in a context in which geopolitical and military tensions are rising in East Asia.
The presence of geopolitics is felt, in one way or another, in all walks of life. Therefore, its arrival to the realm of cryptocurrencies – a complex field that combines economic, monetary and technological factors – is not surprising. The prospective participation of China in such realm means it is rapidly becoming an increasingly fierce competitive arena. It is thus foreseeable that other countries – especially great powers – will develop their own digital currencies in the near future, considering the attractive potential they offer for their national interests in terms of grand strategy.
This article was published by Geopolitical Monitor.com