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The economic impact with the creation of the e-RMB: China’s cryptocurrency

May 20, 2020
  • With e-RMB, cash could disappear
  • The e-RMB should be used to achieve a better position in the export.
  • China’s cryptocurrency could entail a dollar depreciation.

The main enemy of the renminbi: the dollar.

Before you understand China’s goal of launching its digital E-RMB currency, you should first give an overview of why the US dollar comes first.

The dollar remains the major currency worldwide, although not many view the United States positively, particularly due to the high level of debt $ 22 trillionaccording to a report by the government itself. In times of crisis, however, the dollar has been the best-known port and the main currency for exchange for decades. In recent years, the dollar has become very attractive due to the fact that the Fed has raised its interest rates, which has made it more attractive to investors as yields on investing in dollars have increased.

The dominant position of the dollar mainly focuses on international trade and financial transactions. For this reason, the dollar is used as the reserve currency, because if the standard used is the dollar, there is most likely a large amount of dollars in the reserve. This has brought enough advantages to your economy, especially to offer attractive prices for government savings bonds. However, this situation is not an advantage for a large number of developing countries. At the end, The dollar doesn’t solve many of a country’s economic problems, such as debt or deficits. In fact, it is likely that the opposite is true for some countries and that a major conflict will lead to money problems. The best known examples are Venezuela and Argentina.

The economic impact with the creation of the e-RMB: China’s cryptocurrency
The economic impact with the creation of the e-RMB: China’s cryptocurrency

On the side of China, the country was not in the best economic conditions in the 1980s, but strived for accelerated growth over the years, adopting a capitalist system in some aspects (though not in all contexts, mainly) in the social one Order). Worldwide, has tried to position its currency to highlight its economic potential by entering into currency exchange agreements with some countries in America such as Brazil and Canada. A system was set up in 2017 to buy oil in its currency.

China is currently in a good position, according to the Trade Map website. The value exported from China in 2019 was $ 2,498,569,866,000, surpassing the U.S. with a worldwide export share of 13.3%.

The e-RMB, what is it and how does it work?

From what we know so far, the e-RMB, or “digital yuan”, is a digital currency that It uses cryptocurrency technology, which is blockchain technology, but unlike decentralized cryptocurrencies like Bitcoin, it is regulated and approved by the government, in this case the government in China, electronic version of the renminbi. The People’s Bank of China (PBOC) intends to do business with this digital currency.

Although it is true that we do not have an absolute understanding of how the e-RMB works, the fact that it was developed through blockchain technology enables us to have partial knowledge of the form of application, that is, it enables transfers under a P2P (person-to-person) system, faster and at any time; In addition to tracking and authenticating the origin of financial assets, contactless transactions are becoming more efficient and transparent. The first thing that can be said about blockchain technology and the protocol that it could use is the following It will be a different protocol than Bitcoin;; Let us not lose sight of the fact that the PBOC has issued standards for the use or development of blockchain in recent weeks, which give us evidence that the authorities already have advanced levels of implementation and their own rules. The fact that China has released its own standards for blockchain development suggests that interest and research in technology are not new. As we know, for a few yearsChina’s position on crypto assets or ecosystem-related companies was hostile And although they have spoken in favor of blockchain in various statements, this is not a synonym for the Chinese government in favor of Bitcoin or other crypto assets, let alone when it comes to decentralized networks.

On the financial side, the PBOC Coin Research Institute stated in a published document that the equivalent of the banknotes and coins in circulation (China Daily, 2019). This was pointed out in a statement from the official WeChat account The digital renminbi would initially offer digital money to commercial banks or other operators and people could deposit into their digital wallets. It has also been said that large amounts are not spent so that this does not cause an inflation problem and the institutions have to reserve the equivalent.

Although we don’t know exactly how it works, we have data from international organizations on how it might work. For example, the Bank for International Settlements (BIS) has indicated that there are three CBDC models:

  1. Direct model: people get the digital currency directly from the central bank and it is the bank that tracks all real-time operations.
  2. Indirect model: users trust the intermediary who has the central bank’s digital currency
  3. Mixed model: People can access the digital currency through the central bank and also through a financial institution.

From the previous models, China is likely to use a mixed model, as the goal, as mentioned earlier, is to interact with other payment systems like WeChat.

Where was it implemented and with what results?

The information available shows that the central bank has conducted internal tests in cities such as Suzhou, Shenzhen and Xiong’an and plans to conduct further tests in other cities before the Olympics. There is information that small businesses such as cafes and restaurants in Xiong’an, as well as state banks, participated in the tests. For example, the city of Xiongan will mainly use it for clearing services, and bank employees in Shenzhen can pay their taxes, according to a Sichuan Newsnet report.

Other known data is that local government officials from Xiangcheng in Suzhou appear to have been asked to install digital wallets on their phones to receive wages through accounts that have been concentrated by major banks. of the country (Bank of China, Construction Bank of China, Agrarbank of China and Industry and Trade Bank of China). This would pay part of their salaries to the central bank in digital currency. Furthermore, The digital yuan is expected to be compatible with platforms such as WeChat Pay and Alipay, which are among the world’s best-known options for online payments.

There is not much to say about the results at this time as it is a closed project that is still being tested and we have no official communications on how it was used and what results it may deliver.

What does it mean for the digital economy that China is starting this project?

Since the announcement of the Facebook cryptocurrency Libra, China has accelerated the development of the project, probably due to the risk that a technology giant like Libra might release its own currency and possibly have a strong market penetration.

It is likely that this new monetary order is a response from China to the United States. Let us not forget that since 2018 there has been a trade war that involved the United States imposing approximately $ 50,000 in tariffs. The decision was due to China’s alleged “unfair practices” and intellectual property theft. China’s response was the same as it also imposed tariffs on various United States products, including soybeans, one of the most exported products to China. We shouldn’t miss the case of Huawei, too, where Google has announced it will stop delivering Android updates to smartphones this March. Google’s decision appears to have been influenced by the United States government. This year there have been a number of ups and downs in relations between the two countries. Especially on January 15th a kind of “ceasefire” was concluded between the two countries; However, the subject of the pandemic appears to be that it has taken the first steps that have already been taken.

Continuing the Covid 19 theme, another aspect that stands out in this context is the acceleration of digital acceptance. This could be another reason for China’s desire to become a cashless society, in addition to the fear of spreading the virus through physical contact. Regarding this last point, it is known that in China The money that is collected in the regions most affected by the pandemic has to undergo a disinfection process and is also kept for around 14 days to be reintroduced into the financial system.

Let us not lose sight of the fact that a pandemic is like a war, for example the Great Depression, which brought about profound economic change that led to the expropriation of gold. After the Second World War, the Bretton Woods occurred, where the gold standard system was abolished and eliminated by Nixon. In this sense, the increase in the pandemic motivated the President of the United States to radically change his position and made statements about possible “punishments” to China for the responsibility he ascribes to the genesis of the virus, which may have been created in one Laboratory in Wuhan City. Some news suggests that sanctions can range from new trade policies to the lifting of US debt obligations.

The need to open new financial channels

For some time, International organizations such as the International Monetary Fund and the Bank for International Settlements have discussed whether countries should create their own digital currencies or not. The conclusion in most analyzes was that this trend has trends, although they agree that further studies are needed.

Economic studies report that currency crises occur more frequently and more intensively among raw material exporters and that the effects are much higher, more precisely 12% higher than in other countries that are not dependent on raw material exports. . In fact, the collapse is even greater for countries with agricultural exports than other sectors such as energy or minerals.

Some countries, especially those that represent export-oriented emerging economies, use the devaluation of the local currency as a strategy to become more competitive in exports, arguing to boost foreign demand for domestic goods. Credit restrictions also have a negative impact on corporate exports as local currencies depreciate as initial export costs can be significant as exports are more competitive (derived from currency devaluation). But, Where does all this take us? An increase in the financing requirements to cover these acquisition costs and therefore probably larger credit restrictions.

For China, from the above, the devaluation of the RMB has resulted in companies with higher credit restrictions exporting in smaller quantities, mainly in high-finance sectors. Specially, Companies in sectors with higher credit restrictions have an export disadvantage of 23%, and companies with low performance have greater impacts (Li Lan, 2020).. As the RMB depreciates, exporters expand their production to sectors that are less financially dependent.

The possible effects of e-RMB

The immediate impact of the creation of the E-RMB is likely to be that cash is no longer used. and second, that transactions with the dollar are not carried out; That is, it is used for international transactions. This is because even though the yuan is a strong currency, Internationally, the Chinese yuan represents only 4.3% as the most traded currency worldwide, unlike the US dollar, which ranks first with 88.3%., according to the Statista website. Much has been said that the goal is to replace the dollar. However, this is not the case (at least not directly). The aim is to establish a currency that facilitates transactions and decouples them from local currencies when conducting international trade.

The fact that international transactions are tied to one currency offers great advantages to the issuer. The dollar was the primary currency for large transactions worldwide, so the E-RMB would likely have a devastating impact on the United States, as all holders of the dollar will allow US funding from these dollar reserves that the countries have. As the E-RMB positions itself, it is likely that there will be an oversupply of dollars that will have a major impact on the exchange rate, as mentioned in the previous paragraphs. The dollar has long been a reserve instrument. The devaluation of the dollar will create many problems for foreign exporters, as they will have difficulty selling their products in the United States. This is explained by the fact that overseas production is becoming more expensive and retailers need to make more profits in dollars to offset the losses that the loss of purchasing power can create.

What we can see is that there are concerns from China in the sense that the exporting companies that need more investment in working capital are neither affected by the devaluation of the currency nor by any gaps resulting from the restriction and the negotiations in a predominantly digital environment.

As for the other countries, it is very likely that China, after starting to use the e-RMB, will pursue this strategy to mitigate the effects on exports and eliminate the dependency on the US dollar.

In summary, it can be said that governments need to improve their policies and make them flexible, since it is obvious that the sectors with the highest demand are those of basic consumption and this is directly related to exports. China undoubtedly knows how important it is to break new ground for export, and so the logic of creating its own cryptocurrency, the e-RMB as a trading strategy, is not strange.