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China has been working on a Central Bank Digital Currency (CBDC) since 2014, but Facebook’s Libra seemed to create a new urgency. On the surface it appears the CBDC will be for domestic use, but a CBDC will simplify cross border transactions. For a long time, the country has been dissatisfied with the U.S. Dollar’s (USD) ongoing role as the global reserve currency and is committed to extending its currency’s reach.

China has been working on a Central Bank Digital Currency (CBDC) since 2014, but Facebook’s Libra seemed to create a new urgency. On the surface it appears the CBDC will be for domestic use, but a CBDC will simplify cross border transactions. For a long time, the country has been dissatisfied with the U.S.
Chinese Central Bank to increase money supply by $174 billion. As part of the open market operations, the Chinese Central Bank, called the The People’s Bank of China has decided to increase the money supply. They do so by the use of “reverse repo operations.”. This basically means that they are buying government bonds and pay for them.

'China's Central Bank Won't Let Yuan Weaken Past 7 to the Dollar: Sources.' 'Distribution of Chinese exports in 2019, by trade partner.' Tldr; The People’s Bank of China said its digital yuan will have “smart contract programmability” and is based on “the premise of security and compliance.” The digital yuan is controlled by the central bank and is the world's largest CBDC project.

It even has an initiative to denominate international trade credit in Renminbi (RMB) rather than dollars. And the Belt and Road Initiative has seen China extend more than $1 trillion in foreign loans, often with terms that many claim are not repayable without help.

An international Renminbi?

China overtook the U.S. as the world’s largest goods trader in 2014. The country has been the leading exporter for a decade. Hence there is a disconnect between the highest proportion of the world’s trade going through China and its denomination in USD.

Benoît Coeuré, Member of the Executive Board of the ECB, discussed the supremacy of the dollar in a recent speech. Despite the “remarkable rise of China in the global economy [and] its expanding role in international trade,” along with the creation of the Euro, the USD remains the dominant currency.

However, China has wanted to internationalize the Renminbi for longer than its leading trade status, as highlighted by a book from the Asian Development Bank. How does the real money supply vary with government spending. It states that in 2009, China launched a pilot scheme to use the RMB for trade settlement with Southeast Asian Nations which was subsequently expanded.

In 2010 just 1% of China’s foreign trade was denominated in RMB. That jumped to 27.8% four years later. However, the vast majority of that figure relates to Hong Kong transactions. SWIFT publishes an RMB Tracker which shows RMB’s share of international payments is just 1.88% as of April 2019.

But it’s questionable whether SWIFT is a representative measure. In 2015 China’s central bank set up its own international payment system, the China International Payment Service or CIPS. While SWIFT may have 10,000 members, CIPS stands at 900. Only 31 are “direct” members, but it includes big names such as JP MorganChase, Citibank, HSBC, BNP Paribas and Deutsche Bank. In addition to trade payments, CIPS supports instant settlement for financial transactions (Payment v Payment and Delivery versus Payment).

Chinese Central Bank Real Money Supply Reddit News

Recognition of the strength of the Renminbi came in 2016 when the IMF added the currency to the Special Drawing Right (SDR) basket, an international reserve. At the time, IMF Managing Director Christine Lagarde said: “The Renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets.”

In the following year, China undertook numerous efforts to encourage international use of RMB. These lead to the Shenzen-Honk Kong stock link starting to trade, a change in the calculation of the USD-Renminbi exchange rate, and the Renminbi reaching the fifth most traded currency through Swift. China additionally ramped up spending on its Belt and Road initiative.

Spreading the money

The Belt and Road initiative aims to bolster trade between China and foreign countries by providing large loans. Since 2013, the initiative has helped to fund international projects such as high-speed railways, industrial parks, and power grids.

These loans account for “record amounts” of exported capital, according to a June paper from the Kiel Institute for the World Economy. The report estimates that China holds over $5 trillion of debt owed by other countries.

It’s having some impact. For instance, Swift’s report in June found that Africa’s payments using China’s currency increased by 123% over three years. In contrast, the continent’s payments in all currencies only rose by 28%.

The spending of huge sums abroad may be seen as a way to internationalize the Renminbi. It also allows China some leverage over foreign countries since, reportedly, the debt can be problematic to repay.

Kiel’s publication finds that some countries do not even know how much they have borrowed from China and the conditions of repayment. China usually lends funds from one state-owned entity to another, rather than government to government. This primarily affects low-income nations since their governments don’t track company debt statistics. Some researchers refer to this as the Belt and Road ‘debt trap‘.

At the Beijing Belt and Road Forum in April, the IMF’s Lagarde warned of the problematic increase in debt and that funding “should only go where it is sustainable, in all aspects.”

Some have even suggested that if a country is unable to repay its debt, one way to compensate China might be to adopt the Renminbi. And that’s not just for trade, but as the debtor country’s currency. But today that seems farfetched. And may not be desirable to China.

Despite the push for the Renminbi, last year Yicai published data showing that only 14% of Belt and Road trade was denominated in RMB. Again, there is a disconnect between where the funding is coming from and the currency used. In many cases, the countries involved tend to use USD as an international alternative, even when China is funding them.

This creates understandable dissatisfaction and not just from China. The Bank of England’s Mark Carney has commented on the dangers of relying on USD as a cross-border currency. In a speech given in August, he explained the risk of a global liquidity trap has increased since U.S. developments “have significant spillovers onto both the trade performance and the financial conditions of countries even with relatively limited direct exposure to the U.S. economy.”

In the long term, Carney sees the Renminbi as “the most likely candidate for true reserve currency status”. However, he added that the currency is not yet ready to assume the mantle. The Governor pointed out that China is the leader in trade, and the RMB is increasingly used in finance since it has become a more reliable store of value. This was one of the IMF’s key reasons for adding RMB to the SDR basket.

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How the CBDC could help, and Libra could hinder

So, where does China’s digital currency come in? As an easily accessible exchange of value with clear international ambitions, the CBDC could be China’s way of challenging the dominance of the USD. The country’s central bank, the People’s Bank of China (PBOC), is said to be ready for its release.

Indeed, in the last year, China has ramped up preparations to launch its digital currency. For instance, one of the rumored distributors of the CBDC, Alipay, was required to switch to UnionPay for barcode payment clearing. UnionPay is the country’s state-owned card issuer and settlements company, like Visa or Mastercard (but bigger), and has close ties with the PBO