I am closely following the gradual introduction of the Chinese digital currency. Moreover, my curiosity is sharpened by the country’s authorities’ very great discretion around this project. The Trigger Trend site even talks about secrecy. In China, silence and the unspoken have significant meanings; certainly, major projects are at work. What’s new, according to the Tiger research bureau?
First outing from China
He reports that the new Xiongan area south of Beijing is preparing to encourage cross-border e-commerce while exploring its possibility. Is this the first series of tests ?
Internet giants are being brought in to help.
Ali Baba and Tencent have already worked on this currency with the central bank, Bilibili, Meituan, and Didi. All these companies have remained rather discreet about this cooperation.
An undeniable potential
Individual investors are very attentive to companies that could be part of the movement. HyUnion Holding 海联金汇, a company in Fintech and artificial intelligence, had to deny its participation in the project. If 82.39% of adults practice payment on the Internet, only 4% use Fintech to manage their asset. The potential is undeniable. When asked about the money held in these digital wallets, the government does not answer.
The Central Bank does not want to let go of Fintech’s domain and leave the management to private companies. Even if it is claimed that the flows are anonymous, it is elementary for the Central Bank to have all the information on the issuers and recipients of a money transfer. According to the Singaporean Bank DBS chief economist, Neilin Zhou, the central bank, will effectively fight a debt crisis. For example, to stop the worsening of the construction of these ghost towns 鬼城, the Ministry of Finance will interrupt investors’ money transfers very quickly.
The application for digital money :
Internationalization of the yuan
Is the purpose of this currency to challenge the United States? Initially, it was intended mainly for the local market. Still, the turn of Sino-American relations in recent years has prompted the authorities to take a more global and international view. The digital currency could help the yuan’s internationalization, which is increasingly in demand in the financial spheres. We have moved from the position summarized by the Standard Chartered Bank strategist as follows: “The internationalization of the renminbi, originally a good have; now it is slowly becoming a “must-have” 人民币国际化，原来是一个good to have 的东西，现在可能慢慢的变成一个must have. »
The renminbi has been on the rise since the end of May, especially in recent days. When the Yuan is said to rise or fall in China, it is often against the US dollar. Indeed, the US currency was worth more than 7.15 yuan at the end of May. It is currently trading at 6.82/6.83 after breaking 6.9 on August 25. This Chinese progression is instead a fall of the dollar :
The US currency is also falling against other currencies. The euro fell from 1.07 at the end of March to 1.19 today. Forecasters and hedge funds didn’t even see it coming.
Yuan Down against the Euro
On the other hand, against other currencies, especially the euro, the Yuan did not rise; it lost ground :
What do economists think? Columnist Wang Jian takes stock.
What is causing this rise of the Yuan against the dollar?
1. The fall of the dollar. 2. The interest rate differential (利差), 250 points, between the two countries. 3.The policy of Federal Reserve (FED): it has sharply lowered its base rates, it has clearly stated that they will remain low, even if inflation exceeds the target of 2%. 4. The FED wants a low dollar to stimulate the economy. According to journalist Wang Jian, the Chinese central bank is not intervening and is getting used to the situation.
Appreciation of the dollar in the medium term?
Goldman Sachs thinks that the Yuan will continue to rise over the next 12 months, that its level is very dependent on the trade war. Negotiations on trade agreements are not interrupted; it is a factor of rising. On the other hand, according to other financial analysts, a worsening of Western countries’ epidemic could change the situation.
For the Beijing economist Gao Shenwan, the cycle of the renminbi’s decline over the last five years is over, beginning its long-term rise. The world market share of Chinese exports has been steadily increasing until 2015. From 2005 to 2015, the renminbi was overvalued. On August 8, 2015, China lowered the reference rate by 2% against the dollar, which was equivalent to a devaluation. In 2019, the market share increased over 2018 because, according to Gao, the Yuan was undervalued. The current and future increases have several causes: Sino-US trade agreements, an easing of credit conditions, and an undervaluation of the Yuan.
Exporting is doing better
Wang Jian adds that the improvement in exports should also be mentioned. The sector is doing better for several reasons. The factories resumed early enough despite the epidemic, from March-April. Difficulties caused some companies to go out of business, but on the bright side, the best ones have stayed and have regained some market share, and are even making better profits. The global demand for medical equipment is robust, and China is well placed in this field.
According to the journalist, the risks lie in the turn of the Sino-American relations and the situation in Hong Kong. Another crucial point is the ability of the authorities to avoid capital flight. The measures for currency outflows are already strict, but there are still many countermeasures to be taken.
So the consensus is for the Yuan to rise – but the consensus is not always right! The Chinese Central Bank could live with this, provided it is gradual. The trend is not expected to change until the US elections. And after that?
A Chinese reader told me the parallel drawn by Wen Zhao between Chinese digital currency and banknotes’ issuance under the Ming dynasty. The Taiwanese chronicler considers this innovation similar to the printing of paper money with all its consequences. Let us return to these Ming banknotes.
Zhu Yuanzhang fought the Mongolian Yuan dynasty and founded the Ming dynasty in 1368. Hong Wu – his emperor’s name – tried to create a self-sufficient society.
Soon, bronze, gold, and silver used for the exchanges began to run out. The Chinese Empire had already resorted to the issue of banknotes in previous dynasties. To ensure trade, the government in 1375 decided to create a paper currency, called Da Ming Baochao (大明宝钞). The population was obliged to change the metal in their possession to get banknotes.
Lousy time for arrangements between friends
The emperor came from a poor peasant family and harbored a hatred for corrupt officials. The process was aimed, among other things, at this caste and the drying up of their resources. Of course, with this episode, one thinks of the tons of red banknotes piling up in civil servants’ houses’ recesses in our time. China’s economic opening has generated colossal corruption that affects many society levels up to the highest levels. The Chinese press, even if selective, has widely covered these cases. The introduction of digital money also targets so-called dirty money.
Inflation is not far away
Very quickly, galloping inflation followed, and in 1400, two years after the disappearance of Hong Wu, banknotes were worth only 3% of their value. A huge black market had taken place where old metal coins from previous dynasties were exchanged. A new bubble is coming?
What are the motivations?
The arrival of this digital currency raises many questions. What is the real objective? As is often the case, depending on where one stands on the political or ideological chessboard, or according to one’s interests, the answer varies. I read all sorts of hypotheses. Control of society and capital, protection, modernization, sanitation, difficult times. And why wouldn’t it be a cocktail of all these motivations?
I had presented the main features of the digital currency -数字货币 – Chinese here, according to the available data. Today, the Chinese press has recently released some information.
On August 14, the government announced the test areas’ extension to 28 provinces and cities managed directly by the government. The Beijing-Tianjin-Hebei zone (京津冀), the Pearl and Yangtze deltas, and the central-western region are concerned. Questions are being asked about these developments. The Chinese newspapers echo rumors : Shenzhen apartments will only be sold with this currency and that it will not be used to buy gold or foreign currency. Nothing has been officially denied. A Central Bank official only stated that there was no definite schedule for this. Hard to believe! Since the end of April, in the new Xiongan economic zone south of Beijing, many retailers, Starbucks, McDonald’s, JD.com and Subway, are already using tomorrow’s currency. Didi Chuxing, the Chinese Uber, has already conducted tests with its half-billion customers.
Ant Financial and Tencent would be associated with certain projects in the field. Companies in the financial services industry that could benefit from this innovation include: Westone Information Industry 卫士通, Client Service International Inc 科蓝软件，Shenzhen Forms Syntron 四方精创，Koal Software Co 格尔软件, HyUnion Holding 海联金汇 and Hengbao Co Ltd 恒宝股份.
The likely adoption of digital currency is linked to many prospects. China has long sought ways out of the dictatorship of the dollar god. This is one path. Digital currency is, of course, part of the digitization of society stimulated by the two leading groups Alibaba and Tencent, and covered by the central government. Dirty money will have more difficulty evaporating. It will allow better control of the capital. On the other hand, Big Brother will know more about everyone. It’s clear, a different world, a different model is needed. On the whole, the Chinese accept it as long as growth is there and shared – in part!
Discussions and debates abound on the way forward with the consequences of the Sino-American unrest and the epidemic. Huang Qifan, former mayor of Chongqing, an expert in the financial and economic fields, is very pedagogical in his interventions, without the artifice of the common political language. Invited to an economic program, he describes the levers available to develop the domestic market concerning innovation, new infrastructures, overproduction, the automobile, shale, the distribution of wealth, and the development of western China. A summary of these ideas is given below.
The government spent 2.1% of its budget on research and development. Only 5% of this part is targeted at the high-tech segment of infrastructure equipment, compared to 20% in the G20 countries. The objective is to rise to this level. Besides, a legal arsenal will be put in place to protect the innovator’s intellectual rights, development, and commercialization with the constitution of financial funds to push innovations.
The old infrastructure – airports, railways, highways, ports – was mainly financed by the government, required significant investments, and paid off after twenty-three years of use. They had a substantial impact on the local economy. The private sector can partly finance the new infrastructures; they pay off very quickly. 5G technology will enable the deployment of a digital economy that will transform society and affect all areas of the economy, allowing the modernization of old and new activities, we will have smart cities, 智慧城市. The five most important areas are Big Data, Cloud Computing, Artificial Intelligence, Blockchain, Internet of Things – 大数据, 云计算, 人工智能, 区块链, 物联网. This is only the beginning!
Very polluting and old productions have been suppressed. Regarding the steelworks, the installations and equipment have been renewed and are less than twenty years old. Steel production last year amounted to 996 million tonnes. Requirements are 700/800 million, so overproduction is approaching 200 million. The average building in China has 40 kilograms of steel-reinforced construction per square meter, compared to 150 kilograms in advanced countries. Last year, 1.6 billion square meters were built. If we reduce construction to just one billion square meters with 150 kg per square meter, we will use 100 million tonnes more. While reducing overproduction, we increase the life expectancy of a building. Reinforced concrete constructions used since the 1980s have a life expectancy of 30-40 years. With steel reinforcement, the life expectancy rises to 70-100 years. At the same time, the value of the population’s goods increases.
Sales amounted to 25 million vehicles in 2019. To avoid traffic problems, registrations are limited. Consideration should be given to developing public transport, roads, and car parks while relying on renewable energy. China has 170 vehicles per 1,000 inhabitants, compared with 840 in the United States, 600 in France, Germany, and Japan, and 470 in Malaysia and the Philippines. Therefore, China has room for development by merely doubling the number of vehicles per 1,000 people; it should make the registration system more flexible while accelerating infrastructure development to improve traffic flow, which will contribute to growth.
Oil consumption is 650 million tons per year, production 200 million, so more than 400 million tons must be imported. With the growing needs, there is a danger for the security of energy sources. Today, dependence on external sources is 70% and could rise to 80 or even 90%. China has 2500 billion m³ of shale reserves, as much as the United States, it has annual exploitation of 20 billion, it should be able to increase within ten years to 200 billion per year to meet the needs. One can hear the “internal circuit” thus. Use the old industries and develop new niches.
Distribution of wealth
Several measures to improve distribution :
Lowering taxes for the 400 million urban workers to stimulate consumption.
Income taxes account for only 7% of government revenue despite high rates. The average for G20 countries is 20%, in Russia, India, South East Asia, and the Philippines 15%. Why does this tax yield so little in China? There are two reasons: high incomes are taxed at 45% while the tax on corporate profits is 25%, which encourages bosses to find ways to avoid being taxed at 45%. For example, large companies will pay part of their salaries in countries with lower rates, Hong Kong or Singapore – 15-17%. The boss will always find a way to get money out of the company. One rule is that income tax does not exceed corporate tax. In 1980, when the 45% rate was set, it was right, companies had a 55% tax, which was lowered to 33% in the 1990s and then to 25%. Income tax, on the other hand, did not fall and remained at 45%. High-wage earners, in the end, pay little income tax.
In cities, income from property (movable and immovable property) accounts for at least 30% of household income, while it does not exceed 3% in rural areas. The land ownership reform will enable farmers to transfer, rent, or mortgage collective rural land and thus have more land income.
Small and medium-sized enterprises account for 80% of enterprises and provide 70% of jobs, 60% of national production, and 50% tax revenue. In 2018, fiscal measures were put in place for two years; they should be made definitive to allow for a long-term vision and strengthen companies’ and partners’ confidence.
The average consumption was 23,000 yuan per person. 50% is spent on housing, education, and health. At present, in general, only “old” city dwellers can benefit from social housing. Newcomers, young people, students, or rural people who come to work in the city should be able to take advantage of it. In this way, the housing portion would weigh less on the budget, and more consumption would be possible. If spending on housing does not exceed one-sixth of total expenditures, a household’s overall consumption is assured.
The development of Western China, the old strategies of replicating the East’s models, must be abandoned. It is necessary to take into account the characteristics of each region. It is required to give priority to agriculture with significant investments.
Huang Qifan presents several weapons that can stimulate the Chinese economy and rebalance the economy’s structure, which is still very dependent on the foreign market. Long-term strategies that are not rushed every four or five years have ensured the success of the last forty years. The last decade has seen modernization with the arrival of the Internet. The digital economy is still in its infancy and has enormous potential that should be a significant asset for the country.
Debates on the new economic structure that China should adopt are increasing. The government has indicated that the internal market must become more critical. Cao Dewang, Chairman of the Fu Yao Glass Group, and Yu Yongding, Member of the Academy of Social Sciences, spoke on August 12 at the Summer Online Summit on “China’s New Economic Structure.” Their discussion focused on the Sino-American problem. They believe that decoupling is challenging to achieve. Indeed, the restoration of the manufacturing industry in the United States faces many obstacles. In the face of the developing financial war, China must make the necessary adjustments while strengthening the domestic market. A summary of their discussion appeared in the Chinese press:
Cao: The dispute between China and the United States is a political issue. However, the real decoupling of the Chinese and US economy is not easy. The establishment of diplomatic relations between China and the US has been difficult. Still, decoupling is even more difficult – China and the US are very dependent on each other, decoupling is a very irrational and costly choice. But it is not impossible, for political reasons, especially in the high-tech sector, that the United States will contain China and decouple from China.
In addition to the possible decoupling in science and technology, Yu also pointed out that China faces a series of threats from the US in the financial field. However, judging by the current situation, the US should not demand China’s expulsion from the two international financial trading systems, swift and chips. The Chinese government should allow the exchange rate to float freely, insist on the management of cross-border capital flows, increase efforts to establish a settlement system for the renminbi, and promote the renminbi’s internationalization. China should have no illusions that the United States will fight to maintain the technology gap with China for as long as possible, which does not prevent China and the United States from cooperating more in general trade.
The problematic restoration of the manufacturing industry in the United States
Yong: The United States is gradually reducing its dependence on China in the area of general trade. Over the years, US entrepreneurs have moved from China to India, Vietnam, Cambodia, Eastern Europe, and other countries. Trump said that the Chinese were taking American jobs and repeatedly called for American manufacturing companies to return from China to the United States. The “Revitalizing American Manufacturing Power” movement was invented by Barack Obama in 2013 when he was president. The two presidents’ style is different, but they both have the same goal: they both want to restore and reinvigorate the American manufacturing industry. It is the right thing to do to restore manufacturing in the United States, but it is not that easy: First, after the 1970s, the United States introduced labor laws, labor laws, and many other policies. To restore US production now, do we have to revise so many policy documents that were put in place before? Second, it’s been almost 50 years since the United States de-industrialized, it’s been two generations, there’s a shortage of bosses investing in manufacturing. Very few small business owners in the United States are investing in production. The country is facing a shortage of workers. University graduates prefer Silicon Valley, Wall Street, or Hollywood, and few young people are willing to go into the factories. It will be tough for the United States to revive the manufacturing industry within a few years. The traces left by the process of deindustrialization must be addressed, such as labor relations, distribution methods, the development of investor teams, the shortage of skilled workers. Remembering that this is a national strategic transformation, involving human, economic, lifestyle, and distribution change and a slogan is certainly not enough. Economist Huang Qifan, on the difficulty of decoupling the global industrial chain from China, mentions several points: first of all, he believes that the investments needed to rebuild the industrial chain are difficult to obtain and that for China and the United States to decouple, the United States would have to spend a lot of money to reinvest in a lot of infrastructures. It is not easy to set up activities to support industrial reconstruction. In Dongguan, China, an industrial cluster exists, and the parts needed to make a particular product are readily available. But the United States has long-neglected manufacturing, making it difficult to recover without a cluster. The economic structure of the United States hinders the development of production. Finally, the infrastructure for manufacturing development is challenging to sustain. In summary, according to Huang Qifan, the reshaping of the global industrial chain will not be the result of some Western politicians’ hope to decouple from China. Still, the law of the market will prevail, with vertical integration in a more diversified direction.
Cao: Huang Qifan talks mainly about direct investments, American companies in China are reluctant and have difficulty to go back. But the issue of decoupling the industrial chain is not quite the same as that of disinvestment and relocation of American companies. First of all, political factors must be taken into account when discussing the decoupling between China and the United States. The United States fears that China will catch up with or even overtake them. Declining economic growth in China is the political objective of the US political elite. In international politics, it is always the political objective that takes precedence over the economic goal. To achieve the political aim of restricting China, American politicians are allowed to consider sacrificing particular economic interests. Although it is difficult and costly to decouple industrial chains, decoupling is not impossible, especially in the high-tech sector.
The high-tech sector
Secondly, to study industrial decoupling between China and the United States, we need a specific analysis of each industry. For some sectors for the United States, it does not matter whether they are decoupled or not. But there are some sectors, especially in high-tech industries, where decoupling is not an insurmountable obstacle. For example, China is the biggest buyer of chips, and US high-tech companies, like Qualcomm, are going to suffer if they don’t sell chips to China. But for political considerations, to attack China, Qualcomm’s losses are not enough to induce the US government to lift the ban on Qualcomm’s chip sales to China. At the request of the US administration, Qualcomm and TSMC no longer sell products to Huawei. In the semiconductor field, the United States is in a position to drive China out of the global industrial chain that it controls. For example, China also manufactures large aircraft that are very much involved in the global industrial chain. China is a massive aviation market with a potential unmatched in the world. Although the United States appreciates the Chinese aviation market, the US government could have prevented US suppliers from working with China for political reasons. For US politicians, expelling China from the large aircraft manufacturing supply chain is a price they can afford.
The cost of decoupling China from the United States is indeed very high, and it would indeed be detrimental to both sides. For political reasons, the United States wants to beat China; in many areas of high technology, the United States has to contain China, with the decoupling of China, which is not impossible to do. In this respect, we still have to rely on our strength to achieve independent innovation and form a robust industrial system, which takes a long time and requires capital investment in research and development. Still, I fear that we have no better way.
Yong: Since 2018, the economic conflict between the United States and China has evolved more intensely in five areas: tariff wars, investment wars to drive US capital out of China while keeping a closer eye on Chinese companies investing in the United States, technological conflicts such as the 5G war, currency wars, and financial wars. Sanctions and extortion In terms of financial warfare, there are several areas of concern: first of all, the United States could impose some form of financial sanctions on China. Economic sanctions can be used in many ways, for example, against a bank or particular sectors—secondly, financial extortion. Many Chinese financial institutions, such as the Bank of China and the Agricultural Bank of China, have already been subjected to economic blackmail, under the guise of a fraction or issue of some kind. US financial extortion is not only aimed at China, but many European banks have also been extorted on a large scale. Since the financial crisis of 2008, the big banks around the world have been fined $243 billion by the United States, which is a way for the United States to get rich! Thirdly, it promotes massive capital flight. Capital flight can take many forms, it is often associated with corruption, and large amounts of capital have moved to the United States. In 2014 and 2015, China experienced severe capital flight. Of course, outflows and outflows were mainly China’s domestic problems. Fourth, China holds a large amount of US dollars, and the US was able to pass on the US debt crisis by devaluing the dollar and causing losses in Chinese assets abroad. Fifth, the seizure of Chinese assets abroad when the conflict between the United States and China escalated. Martin Wolf, the Financial Times deputy editor, warned in late 2013 that the United States could seize a significant portion of China’s assets in the event of a conflict between China and the United States. Such a possibility cannot be ruled out, and many of the current US practices. It is difficult to predict what the Trump administration will not do. Overall, China faces a range of threats from the United States on the financial front, although so far, there have not been many so-called US sanctions. For example, China’s Kunlun Bank had an oil deal with Iran, and the United States has sanctioned the Kunlun Bank. The US sanctions have mainly excluded it from the dollar settlement system, and it cannot use the dollar or do business with a dollar-linked settlement system. Once a company cannot use the US dollar and the US dollar settlement system, its foreign trade is difficult. This sanction has been applied in the past and will be asked again in the future. We have to be very careful about that.
Swift and Chips
The majority of international financial transactions go through two systems, Swif, and Chips. Thus, the United States must use these systems to serve its geopolitical interests. We hope that we will be able to build a messaging system and a settlement system that can be freed from US control in the future, but there is a long way to go to achieve this goal. Some Chinese academics have also talked about solving this problem by promoting the renminbi’s internationalization, but it is a very long process. As things stand, I think the United States is not going to expel China from both systems. However, China must act and prepare for the unexpected. More than two decades ago, when China’s foreign exchange reserves and foreign assets were small, we considered these possibilities but took no action. As things stand now, many things can no longer be corrected simply by thinking about them, and we can only accommodate ourselves and slowly find ways to get out of them. The proactive measures we can take are limited. To a large extent, we can only pin our hopes on the idea of “killing a thousand enemies and losing eight hundred (or more),” which may make Trump do less foolishness.
The internal market as a pillar
Recently, the central government has put forward the strategic idea of “accelerating the formation of a new development model with domestic circulation as a pillar and the dual national and international cycles being mutually beneficial” (see article). This strategic thinking is also the guideline for dealing with financial decoupling and US sanctions. This direction has implications for China’s future development strategy, economic structure, and balance of payments adjustment. In the long term, this adjustment will significantly strengthen China’s financial security and minimize the Chinese economy’s damage caused by the U.S.-led financial war
Specific policy adjustments are needed: First, the renminbi exchange rate should be allowed to float freely. Suppose the renminbi exchange rate can float freely. In that case, there is no need for the central bank to intervene in the foreign exchange market, buy dollars to increase foreign exchange reserves, or use foreign exchange reserves to stabilize the renminbi exchange rate. Second, the management of cross-border capital flows must be maintained, and the firewall of capital controls cannot be removed. However, the gradual liberalization of specific items under the investment program can be continued. As many systemic problems have not been resolved, the complete removal of the firewall of capital controls may, in certain circumstances, lead to large-scale capital outflows and flight. During the Asian financial crisis of 1997-98, international capital attacked the Thai baht and the Hong Kong dollar. Without firewalls, it would be difficult for China to resist such attacks. Third, intensify efforts to establish a yuan settlement system. Further research and attempts have been made on the issue of digital currency, and in fact, the central bank has already done a lot of work in these areas. Fourth, to promote the internationalization of the renminbi. As long as conditions permit, we will use the RMB as much as possible to denominate, settle, and invest in RMB. Fifth, Chinese companies should fill the gaps in compliance management. Our compliance and anti-money laundering capacity cannot keep up with the significant regulatory needs of Europe and the United States and other countries. Chinese companies still have a lot of work to do in terms of compliance culture, building systems, and talent development. Chinese companies and financial institutions abroad need to be more vigilant and strengthen their efforts to prevent the US government from using its long-term jurisdiction for extortion and blackmail. Sixth, strengthen international cooperation to promote reform of the international monetary system and enhance the role of the SDR as an international reserve currency. Continue to explore the possibility of regional financial cooperation. Seventh, regularly promote asset diversification abroad and reduce US dollar holdings.
Will for hegemony?
Yu Yongding: There is a real problem with the so-called Thucydides trap between China and the United States. China had grown rapidly over the last 40 years, especially after 2001, and especially after the financial crisis of 2008, when the West stagnated, and the Chinese economy went even further. As a result, the gap between China and the United States is gradually narrowing, creating fear in the United States. It is natural for the United States, as a conservative power, to have such a mentality. Although China has no grudge against the United States and does not want to compete with the United States for world hegemony, many Americans do not see it that way. Whether they are Democrats or Republicans, the US government is responsible for the United States’ national fortunes. As a contemporary hegemonic state, it believes that China has threatened its hegemonic position. It will put pressure on China even if it believes that China has no intention of threatening it. Indeed, the United States cannot be sure of that. It is, therefore, obliged to put pressure on China. That has always been the reality of international politics, and China has no reason to complain about it, let alone have any illusions about it. In short, the United States will certainly put pressure on China, especially in the high-tech sector. The United States will do its utmost to maintain the technology gap with China for 20, 30 years, or even longer. However, the United States and China can still cooperate on general trade and investment issues. Of course, China will have to make a very significant adjustment. The trade surplus with the United States is almost $200 billion a year, which is unsustainable: on the one hand, the United States will never allow China to maintain such a large trade surplus; on the other hand, China’s trade surplus with the United States means that it is lending more money to the United States, which is not good for a poor country like China. So, to reverse this situation, we must, on the one hand, firmly oppose US trade protectionism, and, on the other hand, we must also adjust our trade policy towards the United States. To improve the balance of trade between China and the United States, we must increase our imports from the United States. But what we want to buy from the United States they don’t sell to us, and what the United States can sell to us, China may not need. What can we do? We will have to reduce our exports to the United States, but the total volume of trade between China and the United States may decrease. A decrease in total trade is certainly not good for economic growth, especially since a reduction in exports will dampen overall demand. Faced with this situation, we can only replace the weight of the external market by expanding the domestic market. I think that may be why the government has proposed the “domestic round” approach.
An interview that highlights the challenges in the face of the American attacks. China must have a larger domestic market and arm itself financially to withstand the cannon fire of its adversary/enemy/former spouse (your choice). In 80 days, the game may change. Trump said that Americans should learn Chinese if Biden becomes president!
On July 20, the Ant Financial Group announced that it is preparing its simultaneous IPO on the two financial markets of Shanghai and Hong Kong. The company is aiming at a valuation of 200 billion dollars. Jack Ma, the founder of the Alibaba Group, established the company in 2014. It focuses on five activities: finance, technology, financing, insurance, and credit.
Alipay, the front door
The online payment application, Alipay, is the gateway to its services. While Paypal has 300 million users, its Chinese competitor has 900 million people in China and 400 million abroad. Paypal has a capitalization of about $200 billion, Visa, and Mastercard more than 300. As for financial services, the group has 740 million customers and can count on 28 million micro-enterprises. 80% of Alipay users use three other Ant services, and 40% use five services. An advantage for American companies, for the moment, the Western consumer remains more profitable than the Chinese consumer.
Alipay’s competitor on the Chinese market is We Chat’s wallet, which has a 30% market share in online payment. We Chat cannot make the comparison in terms of amounts as they are much lower. On offline commerce, We Chat has a higher market share with a 7:3 ratio in its favor.
Synergy with Alibaba
Alipay also benefits from all the services offered by the Alibaba group with the sale of cinema tickets, travel agency, home delivery. It intends to develop medical advice services. Both companies have invested heavily in development while collaborating with partners for the development of small applications. We Chat works with 1.5 million developers, and Alipay has set up a billion yuan fund for developers.
From finance to technology
The most profitable sector is the financial services sector, particularly with the loan. Economist Huang Qifan, former mayor of Chongqing, estimated that in 2019, Ant had a profit of 10 billion yuan, 45% of which came from two Chongqing companies specializing in “small loans” to SMEs – 36,000 yuan average. The IPO file has not yet been released, but it is believed that Ant granted 1700 billion yuan of credit in 2019, +72% compared to 2018. The insurance sector has very important potential. Ant recorded 240 million yuan in this segment in 2019; the billion should be exceeded this year. Ant wants to put more emphasis on technology services than on finance. Instead of Fintech in Hangzhou, we talk about Techfin. Five areas are at the heart of the research: the blockchain, artificial intelligence, security, the Internet of objects, and information. In June 2020, the group changed its name, removing “financial services 金融服务” for “technology 科技”, and “Zhejiang 浙江” its province of origin, to highlight its core business, technology, on the one hand, and on the other hand remove the local connotation and display its global ambition.
Internationalization is an important pole; in 2018, Ant raised 14 billion dollars for international development. The objective for 2025 is to have 2 billion customers, 50% abroad. Currently, out of 1.3 billion users, 30% are outside China. Asia In recent years, Ant has acquired a number of companies or created alliances. In Asia, development is going rather well. In India, in February 2015, Ant entered the capital of Paytm as a strategic investor to form the first local player in online payment. He sent 100 technicians to Delhi to share his expertise. In two years, the figures have skyrocketed, the alliance’s transactions have increased tenfold with 200 million users, including 90 million assets. By the end of 2019, the number had risen to 300 million. We’re not talking about profitability, but cash burn. Paytm posted a net loss of 500 million dollars. The Indian government, following tensions with its neighbor, in the interests of national security, banned the use of 59 Chinese applications, including We Chat and Tik Tok. On the other hand, Ali Pay and Paytm was spared. In other Asian countries and territories, such as Thailand, Pakistan, South Korea, Malaysia, and Hong Kong, the strategy remains the same: to ally, with minority stakes, with a local leader that has good Internet coverage and a vast network of users.
The United Kingdom, no United States
In the United States, the adventure did not enjoy the same success. The US government vetoed the takeover of Money Gram in 2018 for security reasons. The group led by Jack Ma fell back on the British WordFirst on February 14, 2019, with a sum of 700 million dollars. At the same time, the latter put an end to these operations on American soil. In order to avoid a blockage of the takeover by the American authorities, who takes a dim view of the data of American citizens in the hands of a Chinese company? Alipay has already made numerous agreements with most European countries.
The regulatory authorities
The regulatory authorities in several countries do not always view the establishment of the Chinese giant favorably, while the Chinese administration is keeping a close eye on developments; the Caixin site believes that it presents a real challenge. The banking sector complained that Alipay was operating in some aspects like a bank without the constraints and security obligations of a bank. By 2014, the Chinese Central Bank had already temporarily halted Alipay’s transactions. In the first quarter of 2018, the amount of money available in customers’ accounts amounted to 1690 billion yuan. The regulatory commission has banned companies from using these funds for their own benefit, a common practice in the industry. It enjoined them to deposit them as a reserve on the Central Bank accounts, without any interest. An investigation could be launched by the anti-monopoly committee into Ant and Tencent, the owner of We Chat. The two online payment giants carry out nearly 95% of the country’s online transactions.
There are many questions about how much support Jack Ma needs to “get permission” to go that high and challenge the banks on their turf. Is he part of a club of high-flying businessmen who have the support of the (declining) Shanghai group that the current president has been fighting since he came to power? It is normal for China’s big bosses to deal with politics and to comply with “patriotic demands” if they want to be able to continue to develop their society (see article).
To buy Ant is to buy the China of tomorrow!
Alipay makes money on volume, but the challenge for the group is to transform a low-margin service into a high-margin technology services company. The Alibaba Group has contributed to the profound changes in China’s society and trade over the last two decades; Ant could bring about other profound transformations. Buying Ant shares means buying the China of tomorrow! The service sector generates nearly 60% of China’s GDP, but it is in need of major modernization and will the digitalization give another face to China? Without a doubt!
The Kingold Company, 金凰珠宝, of Wuhan, listed on the Nasdaq, is in turmoil. It had pledged 83 tons of gold as part of a loan from financial institutions, but nothing went as planned, and the gold disappeared or may never have existed!
A great actor in gold jewelry
Kingold was born in 2002, and on August 18, 2010 (two 8s in that date, August is the 8th month!), the group entered the Nasdaq. The company is one of China’s largest manufacturers of gold jewelry. Its sales in 2018 were $2.446 billion, and net income was $49.5 million. For the year 2019, only data for the first nine months are available. Is this normal? They show, over this period, a drop in sales with only 1.443 billion.
To meet cash requirements, the company took out a 160 billion yuan ($22 billion) loan in 2019 from a pool of nine financial institutions. The information released is not yet very accurate and differs. The Chinese media report that after the difficulties of the second half of 2019 and the health crisis, several institutions wanted to ensure the quality of the gold and… Surprise! The first tests on May 22 revealed that the ingots did not contain the precious metal. According to various testimonies, this practice of the owner of the group is not unknown in Wuhan, which explains why most of the lenders are not from the region, such as the trust company of Dongguan. The lenders had taken out a double insurance policy with gold as collateral and an insurance subscription. But, according to initial reports, the insurance could not cover this kind of disappointment.
More grey areas
Journalist Wang Jian comments on little information that falls within the judiciary’s purview, but the size of the case is sobering. He points out that China’s national gold reserve is 1,985 tonnes, and annual production is 380 tonnes. Eighty-three tonnes represents more than 4.5 billion dollars. This is no small matter. The so-called gold was kept in banks. Insurers, financial institutions, banks did not carry out controls… Who took responsibility for going into such an operation? The company with the cooperation of insurance employees? Wang Jian notes that this kind of activity is representative of the state of corruption in banking and financial circles and is reminiscent of specific sectors’ bubble state. Kingold initially set out to buy out a state-owned company in 2002 using a loan and financed itself with unreal gold. A deal that is not going to restore the image of Chinese companies listed in the United States. The share (code KGJI), which had already lost more than 50% since October 2019, yesterday dropped 23.77% on the Nasdaq to finish at $0.85. The share is now traded on the Nasdaq.
To follow, other revelations will undoubtedly bring more precision. The Wuhan government has formed a special team to find out all the ramifications of the case.
China continues to open its financial market to foreign companies. The Chinese official media take the opportunity to underline the open attitude towards the bellicose White House. American Express will indeed be able to operate as of this year, and Mastercard has also received approval. How far does this opening go? The economic journalist Wang Jian, far removed from the official song, gives his point of view on his Youtube channel.
At the right time
After a decline in its economy in recent years, he recalled that the country had found a way to bring in more foreign capital: an opening in the financial sector. The acceleration of openness in recent months is, according to Wang, a sign of the pressing need for its economy, which is not doing well.
Moreover, a consistent Wall Street relationship with the Chinese market is a point that can help China to contain the assaults of the US administration better. For Trump, the financial markets are essential, and Beijing will undoubtedly know how to navigate them well. The maneuvers to get Chinese bonds into the Bloomberg Barclays bond market index or Chinese equities into the MSCI in recent years have made it possible to raise colossal sums of money, which Wang estimates with the two indices at USD 250 and 80 billion respectively. Wang Jian believes that this opening is good for attracting capital but does not give foreign companies access to the most profitable markets.
A. The field of essential urban services Indeed, the area of basic urban services – telecommunications, transport, electricity, water, and financial services – remains reserved for Chinese companies and is subject to a monopoly. The Chinese authorities prefer to keep the best part of the cake for local groups because it is profitable. The first area, essential urban services, generated a profit of 5,000 billion yuan ($700 billion) last year. B. Financial services As for financial services, they can be broken down as follows: commercial banks recorded profits of 2,000 billion yuan, management funds 1,100 billion, insurance companies 300 billion, investment banks 1,000 billion, credit companies 60 billion. The reserved area thus generates nearly 9 trillion yuan (more than 1 trillion dollars).
This opening exists it allows China to attract more investments. Foreign companies are developing in part of the financial sector. Wang Jian retains that the opening is only partial. Will we go further? How much further?
Japan’s economic performance has always aroused a great deal of interest in China. The economist Li Xunlei, faced with Chinese monetary creation, takes the example of Japan’s neighbour to encourage caution in the excessive use of monetary creation. The pandemic has prompted many states to relax the rules of money creation. Japan has a long experience in this area, and it is useful to observe the effects of this monetary policy.
Very low inflation and wage decline
After the bursting of the real estate bubble in the 1990s, to avoid recession and deflation, Japan applied rate cuts to zero, quantitative easing, and purchases of risky goods. According to monetary theory, this policy should have led to high inflation. However, over the last 20 years, inflation has totaled …2%. Wages over the same period show an average decline of 11.3%. The general population is not the beneficiary. Graph on the evolution of wages in Japan since 1970 :
What happened to the creation of money? Certainly, it did not go to products and production.
Banks and financial markets
Indeed, part of it remained in the bank reserves. The Central Bank requires a level of 0.79%, but total reserves reach 27.2%. The circulation of this currency stops in the financial system and does not leave it. Companies have retained part of their profits, equivalent to 27.9% of company assets being put into savings. They have also placed their surplus on the stock market, the Nikkei has risen by 145% in less than ten years, while the country’s annual average growth is 1%. Why is this money creation not going to products?
Wealth and poverty
The main reason is the separation between wealth and poverty. Let’s take ten citizens with two rich and eight poor. The poor will proportionally have a higher consumption of basic needs, and the prices of food and clothing will rise. Whereas for the rich, these areas represent a small part of their expenditure. The lowest income earners use 78.6% of their income for basic consumption while the highest income earners use 36.6%. The money will take over the direction of goods. The bipolar effect has therefore increased, and the income data shows this trend. Indeed, the highest incomes have an ever higher proportion of total income. The concentration of wealth continues. A study by Kitao & Yamada shows that between 1994 and 2013, the “wealth” of the richest 10% increased by 26.1% and that that of the poorest 20% decreased by 47.2%. Money calls for money; the wealthiest have more ease in obtaining loans to invest.
The economist warns of the unproductive effects of monetary “super-creation.” It benefits the richest more and contributes to increasing inequality and the distribution of wealth. He addresses China, but his article is global in scope because we are all facing “helicopter money.”