Will coronavirus usher in a Chinese digital currency faster?
VIX index, sometimes called the FEAR INDEX (as it shows the market’s expectation of 30-day volatility in the stock market), is the highest it has been for 5 years. Wall Street is suffering the biggest decline in terms of points lost ever, falling 1,191 on the back of coronavirus fears; investors are waking up globally to the realisation that, as supply chains are being hit, products cannot be manufactured. The real worry is, should companies’ profits tumble, how will they pay their debts? Should the $250+ trillion global bond markets start defaulting, will investors demand higher compensation? i.e. will interest rates be forced to rise?
The VIX index – otherwise known as the Fear Index
Source: TradingView.com
To date, the Chinese Government has pumped $173 billion into the Chinese economy to maintain liquidity and confidence in its financial markets as the impact of coronavirus spreads. As many Chinese citizens are, in effect, trapped in their homes there has been an increase in the number of people downloading Apps for business and education purposes. According to Sensortower, the Chinese tech giant Tencent’s Tencent Meeting app (which is the equivalent of Zoom for conference calls) was only launched in December 2019 but has already had 5 million downloads.
Meanwhile, in just the first three week of February 2020, student-sector downloads are 50% more than the highest ever full monthly figures. Another well-known Chinese technology firm, Alibaba, has seen its remote working app, DingTalk, being downloaded 670,000 in the first 18 days of January 2020, and since then it has been download another 11 million times!
These statistics demonstrate how the Chinese are already happy to adapt and embrace technology, even in the face of such awful adversity. There has to be concern as to the impact the coronavirus will have on the Chinese economy. It is highly likely that Western companies will question the business logic of having too much of its production in any one country.
If corporate executives see headlines in papers such as the Washington Post reporting, “It’s time for global businesses to admit it: China isn’t a good investment”, company boards will be asking whether it is worth the risk to be over-reliant on any one jurisdiction. Indeed, even before the coronavirus outbreak, companies were already looking to diversify their exposure.
Source: SensorTower.com
CNCB reported in December 2019 that 50 companies were closing factories in China and moving to Vietnam. Samsung, which had been making ‘phones for 30 years in Huizhou (now turned into a ghost town) has moved its production to Vietnam and India. Liu Kaiming, head of the Institute of Contemporary Observation (which supervises working conditions in hundreds of factories in China) has said,
A combination of the Trump trade war with China resulting in increased tariffs, China’s increased record of pollution, and now coronavirus, are powerful head winds for the Chinese economy to fight against. If its citizens cannot go to work due to coronavirus, or they have lost their jobs due to factories relocating, how will people pay their mortgages or rent? The Chinese Government could be forced to continue pumping billions of Renminbi, which literally translates to ‘People’s Currency’, into the economy and this massive increase in money supply could result in inflation rearing its ‘ugly head’.
If, in turn, inflation starts to rise (forcing interest rate increases), this would potentially have a devastating impact on the price of bonds – not to mention the spectre of defaults by corporations and individuals in China.
Meanwhile, the Chinese Government has also been using a Blockchain-powered platform to issue $200 million of loans to 87 different organisations. Henry Ma, chief information officer at Tencent-backed online lender WeBank, recently said, “(Due to the impact of the virus), the negative effects of previous pain points such as lack of trust in business, verification inefficiency, lack of information sharing and difficulty of timely supervision have been further amplified.”
He went on to say, “The cross-border, financial blockchain services platform can play a bigger role, and help medium and small-sized enterprises improve the efficiency and convenience of getting export trade financing and other financial credit support”.
If the Chinese were to go ahead and launch a digital currency, then it would potentially have more monetary tools to control its economy. For example, if the Chinese economy needed a stimulus then the Central Bank could deposit, say the 8,200 Renminbi (£909), to every citizen with less than £900 in their bank account. The idea behind this would be that people who do not have much money are more likely to spend money they are given, compared to the wealthy who might choose to save.
The reason for suggesting 8,200 Renminbi is that it represents 10% of the average annual salary in China. Should inflation start rising and the Chinese had a digital currency, they could ‘dampen down’ the velocity of money (which is often seen as a prime cause of inflation, i.e. too much money chasing too few goods) and impose a fee on all digital transactions. Perhaps now one can begin to see some of the reasons why Central Banks are starting to pay attention and are researching the concept of introducing a digital currency before a private organisation does (such as Facebook, with its 2.4 billion users!)
Interestingly, The Times recently reminded us when reporting about digital currencies and the increased interest from central banks, “As with the transition from silver to gold in the 17th century and the transition from gold to paper money in the 19th century, the world stands on the brink of another historic change in the way it uses money. Yet it is far from clear what the new rules of the game will be or who will get to write them.”
Another unknown quantity is the amount of money that the world owes China and will the Chinese, if they run into economic problems, start asking for their money back? Harvard Business Review has carried out an extensive analysis, and the amount owed to China is estimated to be 5% of global GDP, of which most has been from Chinese State-controlled entities!
For a weekly analysis of Blockchain and DigitalAssets developments email Jonny.Fry@Teamblockchain.net
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