China’s CBDC is about domestic dominance, not beating the dollar
The notion of China racing to launch a CBDC that will end U.S. monetary supremacy doesn’t hold up if you look at the facts on the ground.
For the past several years, the trade war between China and the U.S. has been at the center of international relations, with technology playing an outsized role.
Within crypto, advancing interest in central bank digital currencies has become part of that narrative of geopolitical competition. Many have framed the development of CBDCs in China and the U.S. as a race — in which case, China is clearly closer to launch and, hence, the “winner.”
But a race to the finish is a flawed paradigm, and one to which Cointelegraph has contributed its fair share. For the moment, China is actively working to get its digital payments infrastructure out from under the overwhelming dominance of Ant Group’s Alipay and Tencent’s WeChat Pay. Longstanding designs upon the U.S. dollar have faltered. The narrative of the digital yuan taking aim at the dollar has most prominently come from U.S. firms who were trying to redirect scrutiny from U.S. regulators onto a foreign threat.
The digital currency race that wasn’t
Though it dragged Alipay and WeChat Pay into the geopolitical arena, a midnight executive order from Trump banning use of all Tencent, Alibaba and Alipay apps in the U.S. was more a symbolic attack on China’s malfeasance in international trade that would also complicate Biden’s early diplomacy. Claude Barfield, who studies China trade policy for the American Enterprise Institute, said of Trump’s last-minute move: “That is not rooted in economics, that is just rooted in the last gasp of this administration to set down a record and to in some ways tie Biden’s hands.”
There is also certainly a major competition in tech between the U.S. and China. Martin Chorzempa of the Peterson Institute for International Economics told Cointelegaph:
“I’m under no illusions that the Biden administration is going to let go of the tech competition. The tariff stuff is going to phase out eventually, but my bet is that the tech competition is only going to heat up.”
For all of this hubbub, China’s payments industry has not seen the international penetration necessary to constitute the clear and present danger — which is distinct from other tech firms like Huawei. As far as payments, the firms running them are almost entirely within China’s walled garden. Despite user bases that dwarf U.S. payments apps like Apple Pay or Google Pay, both Alipay and WeChat Pay almost exclusively depend upon Chinese bank account holders for those numbers.
While a digital yuan is obviously a major priority for China, the country’s work against its domestic payments industry proves that it is looking first at home. International usage of the traditional yuan has stalled, despite a slight uptick in the composition of foreign reserve currencies, and clamping down on its internal private payments industry does not help a Chinese CBDC go international..
“Renminbi internationalization has been on the backburner for years now. It continues to be talked about but very few actual decisions have been made to make it usable,” said Chorzempa. “I’m not convinced that the PNC is going to let people use the digital renminbi outside of China.”
The tech monopolies that were
The current anti-monopoly push indeed seems pretty straightforward. Alipay and WeChat Pay control 95% of the digital payments market between the two of them. Adding to the problem is that digital payments have become the standard in China, with many merchants refusing to accept government-issued currency. It’s a problem widespread enough that the People’s Bank of China warned in December that “Renminbi (yuan) cash is the most basic means of payment. Entities or individuals cannot refuse to accept it.”
Keep in mind that plenty of countries would look askance at private hands with such a chokehold on the national payments system. 95% between two private companies is unheard of in any major global economy, and it’s a 95% that is part of two massive conglomerates that independently serve as e-merchants, social networks and messengers. Whatever problems the U.S. faces with its own tech giants are even more heavily concentrated in the Chinese market.
“The Chinese financial regulators reacted just as American, Japanese or European regulators would react,” Barfield noted, referring to a similar antitrust battle in the U.S. “You have this irony where in an authoritarian regime you’re getting echoes of what you’re getting in market economies.”
The IPO offering that almost was
While 2020 saw a number of signals that the Chinese government was going to rein in monopolies that Xi Jinping had allowed to flourish for so long, it was the crackdown on Ant Group’s initial public offering that got everyone’s attention.
Scheduled for November 5, the IPO for Ant Group was supposed to issue $37 billion in equity based on a $300 billion valuation — a world record. At the time, many attributed its last-minute cancellation to Jack Ma’s criticism of China’s financial regulation at the end of October.
A Wall Street Journal investigation published last week suggests otherwise. The results claim that Ant Group had been under investigation prior to Ma’s speech for its opaque ownership. Per that report, the investment vehicles that held private equity in Ant Group stood to gain a fortune when it went public — a fortune that they would then pipeline back into the hands of the richest people in China.
Publicizing underlying beneficial ownership is a very reasonable expectation for a firm about to be let loose upon the public, even when you aren’t already concerned about its stranglehold over financial services in the world’s most populous country.
The crypto outcry that shouldn’t have been
All of which are concerns fairly localized to China. For the foreseeable future, a digital yuan is, likewise, a domestic rather than international tool. In this, the crypto community’s response to its continued development has been interesting.
Many have commented, with more or less skepticism, on a digital cold war. The race to be first simile has also gained enough traction that Fed Chairman Jerome Powell himself took time to dismiss it.
But cycle back through those who have most zealously pushed that narrative. It’s largely composed of people trying to get the U.S. government to look anywhere else. It includes the usual cast of permabulls like Anthony Pompliano, but it’s also heavy on parties facing intensive scrutiny from U.S. regulators.
Mark Zuckerberg threatened Chinese dominance of international payments if Congress continued to stonewall his Libra (now Diem) stablecoin. Incidentally, Tencent said much the same thing about Libra to Chinese authorities. But the biggest culprit has been Ripple.
Almost the entire cast of Ripple’s executive board made effectively the same threat about the U.S. losing the tech cold war to China. Which, in retrospect, seems like a distraction from a firm that was pulling out all the stops to divert the attention of U.S. regulators. And hey, nationalism is a classic card to play. A trump, you might say.
The CBDC that may one day be
None of this is to say that a digital dollar or renminbi doesn’t matter. The point is that framing the competition as a race to be first is risky practice, precisely because it shuts down critical thinking about an important area and also assumes that everyone in the world is chomping at the bit to entrust all of their money to a brand-new technology.
In a January paper, Chorzempa pointed out that China’s private payments giants, which hit the market long after Apple and Google Pay, actually benefited from a second-mover advantage. They could learn from the mistakes of the original American firms. The race paradigm is just inappropriate for money, which people are most conservative about implementing changes to. Less obviously, it’s not even the main consideration when it comes to technology. Think of Skype vs. Zoom, or BlackBerry vs. IPhone.
Congressman Bill Foster spoke to Cointelegraph way back, following the Zuckerberg hearing, about the China argument, when the idea of a race was really taking hold. He said: “When you start to move into financial instruments you have to be very careful that you are not reinventing a lot of the problems that we’ve learned the hard way creep up again and again in financial services.”
Money has a weird set of priorities. Continuing to explain the pros of a digitized dollar, Foster said:
“I think that will be a competitive advantage for the United States and the free Western world, is that we have a transparent court system where you know the rules you’re playing with and you won’t have the party leaders come in and say, ‘ok, I want all your information.’”
Alongside unconsidered advantages like court transparency, it takes much more than a new technology to overthrow the leading global currency. In the U.S.’s case, it took two world wars, economic ascendancy and fears of a global takeover by Communism. As appealing as the idea of digitized bearer instruments that could even skip the hassle of international banking and settlement may be, it’s not going to happen all of a sudden.
China and the U.S. are going to continue to duke it out in the tech arena. But there is a reason people like Chairman Powell or digital dollar advocate J. Christopher Giancarlo had to decry the haste to launch. Money is not something that a government can afford to get wrong.