The People’s Bank of China (PBOC) rolled out an advanced digital currency experiment in October 2020. The Digital Currency Electronic Payment (DCEP) will be a blockchain-based digital version of the Yuan (CNY). In 2019, 80% of all payments in China were through electronic payment via WeChat Pay and AliPay. The PBOC wants to take this one step further and in the process improve the efficacy of monetary and fiscal policy through an increasingly cashless society and with a goal of enhancing financial inclusiveness.
The next natural step for China’s digital currency would be as an aid in opening up the country’s capital account, which is currently severely restricted, making the CNY essentially unavailable to anyone outside of mainland China. Allowing full access for foreigners into Chinese capital markets will reduce the main barrier of concern for foreign investors for using the CNY in trade and investment: its liquidity and direct access to their investments inside China. Meanwhile, the stability of the Chinese currency and the built-in traceability and oversight that blockchain tech enables would virtually eliminate the risk of capital flight or illegal transfers out of China.
This idea sits well inside China’s Dual Circulation framework, improving transparency within China, while growing the CNY’s use externally as a compelling alternative to the US dollar in transactions, avoiding the latter’s weaponisation by the US. As a government-sponsored centralised currency, it will still be viewed as “fiat currency” and won’t have the appeal of decentralised blockchain-based currencies like Bitcoin; but from China’s perspective this is a feature of the digital Yuan and not a bug, as it allows negative rates for “cash”, and nominal GDP targeting is far easier to achieve as well.
Opening up China’s capital account and creating a currency that rivals the US dollar for reserve status will help boost Chinese consumption, fund an entirely new Chinese pension system and deepen the country’s capital markets.
Trade: Short the US dollar and overweight Chinese government bonds and equities versus the rest of the world.
See next 2021 prediction:
Revolutionary fusion design catapults humanity into energy abundance
Quarterly Outlook Q3 2022: The Runaway Train
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.