Friday, January 22, 2016

More On China's Cryptocurrency Push and Financial Repression

Following up on yesterday's "You Call That Financial Repression? I'll Show You Financial Repression: Chinese Central Bank Explores Cryptocurrency".

First up, state mouthpiece Xinhua:

China to issue digital currency "as soon as possible"
China's central bank on Wednesday announced that it will try to issue digital currency "as soon as possible."
A team in the central bank is examining domestic and global experiences. Digital currency costs less in circulation than traditional paper, facilitates trade, boosts transparency, and cuts money laundering and tax evasion, according to the People's Bank of China at a conference on digital currency.

They will improve the central bank's control of currency to better support development, and bolster new financial infrastructure and complete payment systems, it added.

The team was set up in 2014 and has made progress on technology, legal issues, and the impact on financial systems. 
HT to The Diplomat who writes:

Move Over, Bitcoin: China Wants to Issue Its Own Digital Currency
China’s central bank plans to issue its own digital currency “as soon as possible,” according to Xinhua. The People’s Bank of China made the announcement at a conference on digital currency in Beijing.  

According to Xinhua, in 2014 the PBOC set up a team to examine the possibility of establishing a digital currency and particularly to study experiences in China and abroad. Two years later, the team “has made progress on technology, legal issues, and the impact on financial systems,” Xinhua said.
Charlie Custer, writing for Tech in Asia, notes that China is still a long way from actually rolling out a digital currency. Plus, he’s skeptical that the idea will take off in the country: “Chinese consumers are historically conservative about their savings, and dumping lots of money into a brand-new wholly-abstract digital currency could be a tough sell, even for China’s Central Bank.”

So why is China pursuing its own digital currency? The PBOC listed a number of practical benefits: a digital currency is cheaper (because it reduces the need to print money), makes trading and financial transactions easier, and also helps cut down on money laundering and tax evasion.

However, the logic behind the move may be even simpler. China’s attitude toward foreign cyber innovations has long been “if you can’t beat ‘em, copy ‘em.” China can avoid the aspects of Western technologies it doesn’t like by coming up with its own home-grown alternatives — with Chinese characteristics, of course. Creating a new, official Chinese digital currency could allow Beijing to finally bid goodbye to its complicated relationship with the current reigning digital currency, Bitcoin.
Bitcoin experienced its Chinese heyday in late 2013, helping to raise the value of a Bitcoin (BTC) over $1,200. The currency’s popularity snowballed in October, when Chinese internet giant Baidu agreed to accept Bitcoin as a payment method for subsidiary services. At first, the Chinese government seemed bullish on the currency, but there were always lingering concerns, given how little control Beijing had over regulation and tracking of Bitcoin transactions.

In December 2013, Beijing moved to curtail the growth of Bitcoin, barring Chinese banks and financial institutions from treating Bitcoins as currency. The bank cited concerns over potential money laundering and financial stability as the rationale for the move. The PBOC also told third-party payment processing companies to stop accepting Bitcoin, leading China’s major BTC exchange to stop accepting deposits using China’s renminbi.

Now, China has announced that it’s rolling out its own alternative to Bitcoin, one that will presumably maintain the convenience of a digital currency while removing the aspects Beijing finds most troubling. As Custer points out, China’s eventual digital currency would be quite different from Bitcoin, in that it will be tailor-made for the Chinese government to easily track transactions, and will be under the aegis of China’s central bank. In fact, the PBOC believes a digital currency will actually improve its ability to control China’s currency....MORE
If wary reader is new to this stuff and wishes some backstory, one of the places we linked to in yesterday's post is the National Bureau of Economic Research:

The Liquidation of Government Debt 
Carmen M. Reinhart and M. Belen Sbrancia
NBER Working Paper No. 16893 March 2011
JEL No. E31,E4,E6,F3,F4,H6,N10
 Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum). We describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era