From Marc to Market, June 15:
(co-authored with Bob Lynch, a global macro strategist, focusing on currencies, interest rates, and cross-asset solutions. He consults and provides investment advisory for institutional money managers, corporations, family offices, and high net worth individuals. He previously worked with J.P. Morgan Private Bank, HSBC, and BNP Paribas. www.linkedin.com/in/robertlynch6 )....MORE
As governments around the world manage their respective economic-restarts from the COVID-induced lockdown, there will be a host strategies and innovations employed to assist the process. For China, one element of that strategy may include the acceleration of its plans to introduce a digital currency.
China’s digital currency project has been underway since 2014 and reports just before the COVID outbreak suggested it could be introduced as soon as this year. Under normal circumstances, a successful digital currency would reduce payment frictions and demonstrate China’s ongoing efforts in technological advancement. But in the post-COVID era, when reviving economic growth will be paramount, the potential for enhanced commerce/consumption via a streamlined payment system becomes even more appealing.
To achieve relative stability, the digital currency would have to be more like a “stablecoin,” linking the currency’s value 1:1 to the renminbi and essentially creating a digital yuan. That construct would likely be more stable than one linked to a basket of currencies such as Facebook’s proposed Libra project, let alone one without any fiat currency linkages such as Bitcoin or Ethereum. It would be tantamount to a digital expression of the paper and coin form.
It is not yet clear exactly how the digital yuan will work. Likely it will be an app on a smartphone that one registers. There would, of course, be robust security and a record of every transaction both locally and someplace else. Henceforth when you get paid or receive funds, it would go directly into your secured account. When you pay, it would be withdrawn from the same account.
Chinese consumers are already more familiar than many westerners with paying for nearly everything from a smartphone. Alipay is ubiquitous, and a digital currency seems to be a modest evolutionary step. Even now, tourists in China need to access the local apps to do basic things, like secure a ride or purchase food or drink in many places.
The sheer size of China’s population and economy gives it a unique advantage to establish scale, turnover, and usage of a new digital currency. Sweden plans to introduce its own digital krona next year as part of its broader effort to ban cash transactions in 2023. Still, Sweden is a relatively small economy with a fairly homogeneous population where social trust measures run high. China is pushing hard to be the first large country to adopt a digital currency, and the pandemic may accelerate its efforts. There may not be the same kind of first-mover advantage with a digital currency as there was with selling books on the internet. Nonetheless, a digital currency, based on its patented technologies, is a prestigious accomplishment for the status-conscious Chinese elite.
A digital currency recognizes that a payment system is a utility....
