Abstract
Russian President Vladimir Putin will propose building a new financial system at the BRICS summit in Kazan, The Economist writes. This is the BRICS Bridge system that China has been developing for several years through its state digital currency. Here's how it works.
In their essay "XiJinping's China. Towards a New Sinocentric World Order?" published last year, authors Nicola and Gabriele Iuvinale devoted a long paragraph to the study of the Chinese project "e-CNY and the Global Standard of Central Bank Digital Currencies".
Financial decision makers in the United States and Europe have just started to study a digital dollar or euro; China, on the other hand, is already in the midst of digitizing its entire economy and its digital state currency, the e-CNY. Chinese financial and technology companies are innovating, creating new applications on the e-CNY architecture to make financial transactions faster and more dynamic. The Bank for International Settlements (BIS) has launched a program, called the Multiple Central Bank Digital Currency Bridge (m-CBDC Bridge), that will allow e-CNY payments to be processed, directly, between China, Hong Kong and other countries, including Thailand and the United Arab Emirates.
The authors have shown how these arrangements can circumvent state controls that are, admittedly, based on conventional letters of credit through current banking processes. For example, by creating an alternative means of international exchange, mBridge would make it more difficult for the West to enforce economic sanctions and investigate crimes. Any bank that fails to diligently comply with Western demands risks being cut off from the SWIFT system, with potentially major trade implications. As an encrypted and opaque channel outside of Western jurisdictions, mBridge presents itself as an alternative solution.
In the short term, China could also use the currency and related infrastructure to circumvent US sanctions. A direct blockchain-based currency link could facilitate trade and support in places like Iran, Venezuela, and North Korea. It would also relieve sanctions pressure on Russia, which has been dumping its USD reserves for years. The CCP is not just handing out e-currency to citizens; it is overseeing a growing digital ecosystem of renminbi. The concept of "yuan-gas" was also proposed in China's 2017 World Energy Development Report. Given the fragmented nature of global natural gas markets and China's leverage as the largest buyer, the emergence of a yuan-gas is not a pipe dream. Russia, Iran, and China collectively produce more liquefied natural gas (LNG) than the United States, and they all have non-dollar financial infrastructure.
If the United States frequently uses financial sanctions weapons, it will create more "centrifugal force", which will directly accelerate the global trend of "de-dollarization of the United States". Thus, the effectiveness of financial sanctions will be limited by other factors, such as the economic size and structure of the sanction target.
by Nicola e Gabriele Iuvinale
U.S. and European financial policymakers have begun to study a digital dollar or euro; China, on the other hand, is already in the midst of digitizing its entire economy and its digital state currency, the e-CNY.
For several years these projects had been only a topic of discussion in the Chinese Communist Party. Now, however, they have become a reality. In July 2021, the People's Bank of China outlined progress in the development of its e-CNY and revealed how the CCP is introducing new financial technology (fintech) into China's huge economy. Chinese financial and technology companies are innovating, building new applications on the e-CNY architecture to carry out faster and more dynamic financial transactions. Examining the CCP's national fintech strategy, we see how the private sector is working to make Chinese money even "smarter".
Primarily a domestic issue, but it is highly likely that this policy will spill over into foreign policy as well, as China is pushing the rest of the world to follow its technological path. Beijing's focus on fintech is a geopolitical move, in a global race in which the nation with the best big data will win. And should the global digital economy evolve, as is inevitable in following China's technological innovation, this will give the CCP much more bargaining power in in- ternational trade.
While Western policy discussions on technology and data tend to focus narrowly on the issue of privacy protection, the CCP sees and exploits data as a pillar of the national infrastructure. In 2017, President Xi Jinping called data "a new factor of production, a fundamental and strategic resource [...] needed to build a digital economy." The Chinese government aims for digital information to power the infrastructure and applications that govern daily life, allowing the state to use it for political and economic purposes.
Although a digital renminbi cannot, in the short term, di- retly compete with the more stable and attractive U.S. dollar globally, the func- tionality of the digital currency could propel Beijing-led innovation within the global financial system. In fact, China's long-term economic-digital strategy includes creating a "gold standard" in emerging digital technologies that no country, not even the United States, is dominating. China is quo- tidally intensifying its fintech projects while simultaneously gaining more and more influence in shaping international political discourse; Beijing could end up "unilaterally" deciding the rules of new global financial practices and thus see its own digital technologies adopted internationally as well. This would make Chinese fintech more relevant to global com- merce and, thus, give the Beijing government greater international leverage.
In its latest report published on July 8, 2022, the British House of Commons Foreign Affairs Select Committee stated that malign actors such as the Chinese and Russian regimes "are trying to rewrite the rules underlying our international systems and technological development, and its standardization gives them the opportunity to do so".
The Chinese market has had digital and mobile payments for years, but a digital renminbi, the e-CNY, is a distinctly different development. It allows users to directly hold a digital asset issued by the central bank and transferable between different banking and payment platforms. The e-CNY had a pilot phase in April 2020. To incentivize citizens to pay using digital currency, the government has come up with a particular initiative: a lottery that put a total of 10 million digital yuan (1.2 million euros) up for grabs for about 50,000 citizens to spend on everyday expenses. The Chinese government's stated purpose is to eliminate the use of cash to deal with problems such as evasion, money laundering, corruption, and ga- rant greater monetary stability. Then it turned to a pro- gress and implementation strategy for the entire financial sector. In early 2021, the CCP offered randomly selected citizens small amounts of free e-CNYs to spend online or via wallet apps.
By the end of June 2021, about 21 million people and 4 million companies had e-CNY wallets and had conducted about 71 million transactions totaling $5.3 billion in digital renminbi. The numbers are still small compared to the economy as a whole, but they offer the Chinese government "real," concrete data. O n January 5, 2022, the day after China's central bank launched an e-CNY wallet, the most downloaded app in Apple's iOS Store was this one. Within the first two weeks, 261 million users had installed the app, although only 12 pilot locations are currently able to use that wallet.
As of February 2022, more than 87.5 billion yuan (US$13.78 billion) worth of e-CNY transactions had been conducted, according to government data. In addition, as of November 2021, more than 10 million corporate wallets had been created, according to Mu Changchun, director of the PBOC's Digital Currency Institute. Among the pilot program localities, many have initiated efforts to expand e-CNY abroad. Qianhai District, adiacent to Hong Kong, spends about $1.5 million a year to motivate businesses to develop cross-border uses of e-CNY and to support its research. The Guangxi Autonomous Region and Hainan Province are planning promotions for cross-border business uses.
Today, millions of retailers across China are adopting payment systems that accept the currency. Chinese telecommunications giant Huawei has even preinstalled an e-CNY wallet in its Mate 40 line of smart phones, spurring the adoption of the digital yuan in new markets. With more than100 million Chinese consumers already using this currency, the e-CNY has already crossed borders. The Bank for International Settlements (BIS) has initiated a program, called the Multiple Central Bank Digital Currency Bridge (m-CBDC Bridge), that will allow e-CNY payments to be processed, directly, between China, Hong Kong and other countries, including Thailand and the United Arab Emirates.
The mBridge, which is still in the pilot stage, promises big benefits that at- draw businesses and governments. It would allow inter- national transfers to take place in seconds, and the cost to users of such transactions could be reduced by up to half. Payments with mBridge can av- come at all hours of the day and night, eliminating the time zone misalignments that
make "goods delivery" payments impractical in transcontinental transactions. By enabling verifiable payments in real time, mBridge would dramatically reduce the risks and burdens administrative tasks inherent in global trade. The mBridge project has made significant progress. By 2021, twenty-two major international banks, including UBS, Standard Chartered, and Société Général, had identified fifteen beneficial uses of mBridge in international trade, capital market transactions, digital corporate bond issuance, supply chain finance, and programmable trade finance. Starting in 2022, Goldman Sachs will test tokenized bond issuance and HSBC programmable trade finance.
As mentioned, the e-CNY project is expanding more and more to support the practical needs of everyday payments. By 2020 to mid-2021, Chinese state-owned and private companies had already filed 271 patents related to the digital renminbi.
In late 2020, Baosteel Co. Ltd. and Baowu Raw Materials, under the "China Baowu," have also developed a blockchain-based trade finance platform, Effitrade, which enables companies to make cross-border paditions through letters of credit. Effitrade, as of August 2021, completed the opening of cross-border RMB letters of credit with mining giant Rio Tinto Groupe Vale, totaling nearly 800 million yuan.
China could promote the adoption and internationalize e-CNY by asking countries in its Belt and Road Initiative to col- lect their CBDCs (state-owned digital currencies) to mBridge and use it for transactions. Recall that with more than 2,500 projects, worth $3.7 trillion, the BRI is "a major driver" globally and is the centerpiece of the dual circulation macroeconomic project that enshrines China's ambition to become self-sufficient in resources andtechnology over the long term, in developing domestic and external demand.
Letters of credit are issued and applied by banks, but an e-CNY-based one, running on a Chinese trade finance platform, would likely complicate traditional banking processes. And this is because not only would the platform itself be operated in China, but the data on e-CNY transactionswould be made directly available to the Chinese government. These arrangements could also circumvent state controls based, admittedly, on conventional letters of credit through current banking processes. For example, the mBridge, by creating an alternative means of international exchange, would make it more difficult for the West to enforce economic sanctions and investigate crime. The current dollar-based international exchange system is based on a global network of col- lated banks and a set of communications known as SWIFT. Because the United States and allied countries dominate this system (a hub-and-spoke infrastructure in which most hubs depend on a presence in the West), they are able to impose sanctions and monitor money laundering and other crimes. Any bank that does not dilidently comply with Western demands risks being cut off from the system, with potentially major business implications. As an encrypted and opaque channel outside Western jurisdictions, mBridge stands as a solution alternative.
In the short term, China could also use the currency and related infrastructure to circumvent U.S. sanctions. A direct blockchain-based currency link could facilitate trade and support in places like Iran, Venezuela, and North Korea. It would also alleviate the pres- sion of sanctions on Russia, which has been dumping its reserves in USD for years. The CCP is not just distributing electronic currency to citizens; it is supervisioning a growing digital renminbi ecosystem.
Chinese press reports are vague about the complexity of the operations behind these transactions, but it appears that, at each step, the payment would be verified for taxation purposes. It is unclear whether the process would automatically report data to tax authorities, but given the CCP's goal of developing a national government database of digital transactions, it seems likely that this information would go directly to the government; equipped with this surveillance capability, the Communist Party can further deepen its political control over Chinese society.
This innovation, therefore, will strengthen the CCP's digital authoritarianism.
The digital renminbi is a CCP tool to collect every byte of financial data to aggregate, analyze and exploit it to build a stronger economic and political apparatus. The goal is for money to be "smarter" to make the state "smarter," that is, the CCP more powerful. As the world economy becomes more digitized, innovation will go at- tween interpreting aggregate data, so as to also gain a van- tage in global economic competition.
In 2020, China pledged to spend $1.4 trillion on "next-generation" digital infrastructures by 2025; a blueprint for the development of the digital economy that aims to increase the contribution of major industries in the sector to 10 percent of GDP by 2025.
In October 2021, Li Lihui, head of the Blockchain Research Working Group at the National Internet Finance Association of China and former president of the Bank of China, said, "China's central bank's digital currency experiments lead the world and should strive for a dominant position in the digital currency globalization process." Among his priorities, Lihui
mentioned using digital currency to clear payments from international financial institutions, building an international digital financial and asset center.
The CCP has realized the importance of this economic calculation. It is also likely that the Beijing government will transfer foreign and domestic data to Chinese companies to give them competitive advantages. Most countries exploring ways to digitize their economies should dictate the re- gress in developing technological and policy standards that enhance economic innovation and prosperity without promoting authoritarianism. So far, however, only research papers and theories are being produced on digital state currencies, while China already has real-world data to study, provided by millions of companies and consumers.
Beijing recently outright banned cryptocurrencies, instead introducing a state-led version of them firmly under government con- trol.
Chinese leaders are also trying to prepare their economy to withstand the heavy economic blow caused by a forced de-accumulation already underway.
These concerns are not new: they had advocated reform of the global financial system immediately after the Asian financial crisis in the late 1990s, seeking to protect themselves from the hegemony of the U.S. dollar.
In 1999 Dai Xianglong, then governor of the People's Bank of China (PBOC), said that the existing global financial system "needs to be reformed" because "the role of the international reserve currency, played by the national currency of some countries, has been a major source of instability".
A major component of China's defensive strategy, against perceived restraint by the West, is the construction of a yuan-based global commodity commercial system in an effort to improve pricing power, reduce China's vulnerability in global resource trade and strengthen Beijing's global financial position. Major oil suppliers to China, such as Russia, Angola, Venezuela, Iran and Nigeria, now accept yuan for payments. In China's 2017 World Energy Development Report, the concept of "yuan-gas" was also proposed. Given the fragmented nature of global natural gas markets and China's leverage as a major buyer, the emergence of a yuan-gas is not a pipe dream. Russia, Iran, and China collectively produce more liquefied natural gas (LNG) than the United States and all have non-dollar financial infrastructure. Another component of a China-initiated financial system is the PBOC's Cross-Border Interbank Payment System (CIPS), implemented by the digital yuan. Launched in 2015, CIPS has become a financial infrastructure that could enable sanctioned entities to enter global markets.
CIPS combines fi- nancial messaging services and settlement functions in a single platform. It is the Chinese alternative to the "SWIFT + CHIPS" (Society for Worldwide Interbank Financial Telecommunications and Clearing House Interbank Payments System) combination that moves dollars between different institutions globally.
In addition, China's plan to establish a pool of yuan cash reserves with the Bank for International Settlements could help promote international use of the currency. According to analysts, China's plan, as well as in Indonesia, Malaysia, Hong Kong, Singapore, and Chile, could pave the way for the currency to play an anchor role in the Asia-Pacific region. The announcement highlights the effort the Chinese central bank is making to put in place infrastructure to help reduce the hegemony of the dollar.
On June 22, 2020, Hong Kong's South China Morning Post newspaper reported that Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that because China relies mainly on the U.S. dollar payment system in international transactions, it would be vulnerable to possible sanctions by the United States.
Fang Xinghai said at a forum organized by Caixin in July 2022, "Such a thing has already happened to many companies and financial institutions in Russia, and we need to prevent it early and make real preparations, not just mental preparation." Fang Xinghai's comments came as the U.S. Congress was considering using the pivotal role of the U.S. dollar in international payments to "punish" Chinese individuals, companies and financial institutions over issues such as Hong Kong. Fang added that for a long time the U.S. has occupied an absolute dominant position in the global monetary system, thus establishing the strong position of the U.S. dollar and controlling the international payment and regulatory infrastructure. The U.S. dollar accounts for more than 60 percent of global foreign exchange reserves and 90 percent of international capital transactions. The currencies of many countries are pegged to the U.S. dollar, and the interest rate market also follows the policy of those of the Fed. The U.S. dollar is used by most countries as a quotation, payment and com- pensation tool in international transactions. Fang Xinghai added that the United States controls the Society for Worldwide Interbank Financial Tele- communication (SWIFT) and the
New York Clearing House Interbank Payment System (CHIPS). SWIFT is a world-class financial message transmission network that provides information transmission, pamenting and regulatory services for global financial institutions. Fang Xinghai's remarks show that Chinese policymakers see possible U.S. financial sanctions as a real risk. Fang pointed out, "The internationalization of the renminbi is a topic that needs to be planned in advance and cannot be avoided when facing external financial pressures in the future, and the promotion of renminbi internationalization should be accelerated in the next 10 years." He pointed out that if the internationalization of the renminbi can make more progress, China's ability to resist financial "decoupling" will be greatly milled for three reasons:
1) China's government and citizens hold a huge amount of assets abroad, most of them in U.S. dollars. Under the guidance of the Federal Reserve's current monetary policy, the value of US dollar attivities faces great uncertainty;
2) China's monetary policy, financial openness and financial development are all influenced by the global monetary and financial system. Under the Federal Reserve's current monetary policy, if the global monetary and financial system were to face great uncertainty and many risks, it would be an issue that would need to be weighed thoroughly;
3) most Chinese financial institutions and various enterprises and entities conduct international business relying mainly on the U.S. dollar payment system, and this is of great concern because U.S. financial sanctions would be a double-edged sword. On the one hand, the United States can unilaterally use financial sanctions without UN resolutions under its domestic laws, so financial sanctions would be asymmetrical powers enemies and self-destruct eight hundred" is recalled to indicate that sanctions and counter-sanctions coexist with risks. Moreover, according to Fang, if the U.S. used the weapons of financial sanctions frequently, it would create more "centrifugal force," which would directly accelerate the global trend of "U.S. de-dollarization." Finally, the effectiveness of financial sanctions would be limited by other factors, such as economic size and the structure of the sanctions target.
Even the Hoover Institution, in its 2022 report, points out how the e-CNY could ultimately "undermine the traditional dominance of the U.S. dollar as the dominant reserve currency and source of geostrategic influence. The declining power of the U.S. dollar would also diminish a key in the U.S. national security playbook: the ability to deploy cripplingsanctions against rogue states and those that violate human rights".
The United States and the European Union, with allied states, should step forward to lead the development of an international regulatory framework on digital currencies, including Central Bank Digital Currencies (CBDCs), that prioritizes consumer protection, privacy, financial compliance against crime, financial stability and the protection of monetary sovereignty.
In May 2022, U.S. Senators Tom Cotton, Marco Rubio and Mike Braun introduced a bill to prohibit companies that own or control app stores from selling apps in the United States that support or enable e-CNY transactions. The move comes after WeChat, a messaging and payment app owned by China's Tencent with more than 1.2 billion users, announced it would begin supporting that currency in early 2022. Alipay, the popular payment app owned by Jack Ma's Ant Group, also accepts the digital currency. Both apps are available in the Apple and Google app stores.
Let us not forget that the structuring of a fair international monetary system is the indispensable prerequisite for the normalization of world political and economic balances. Since the subject, although of fundamental importance, constitutes a purely technical aspect of economicpolicy, it should be preliminarily clarified that it presupposes, upstream,
discourse that must necessarily touch upon essential aspects of rationality, ethics and culture, because, otherwise, the monetary instrument "goes crazy" in the hands of those who use it and is no longer an instrument at the service of collectivity, but instead a serious threat to the very fundamentalfreedoms of peoples. When jaw-dropping terms enter mainstream language, the public loses awareness of their meaning and adapts to accept even absolutely extraordinary episodes as normal facts. Without careful and consequent awareness of the importance of what is at stake, the world could evolve into a digital economy with the characteristics desired and controlled by the Communist Party of China.
The text is taken from the essay "Xi Jinping's China. Towards a new Sinocentric world order", Nicola and Gabriele Iuvinale, Antonio Stango Editore, 2023.
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