China’s proposed digital currency may be used beyond its shores and it’s worth the interest of countries like the US whose regulatory ambit won’t cover such transactions, a former chief economist at the IMF has suggested in an interview.
Though China’s digital currency electronic payment project is still in the works and no concrete information has been made available about its use, features and reach, Kenneth Rogoff believes China has the ambition to challenge the US dollar dominance with the planned currency. The measure of its threat could trump any effect a stablecoin like Facebook’s proposed Libra could have on regional central banks and their monetary policies, he opines.
“Well, if it’s a currency like Libra or even Bitcoin, the rich countries have the ability to regulate where you can use it: Can you spend it in stores? Can you cash it in banks? By controlling that lever, they can really control it,” Rogoff says on First Move. He added that the case will be different for a state-sponsored digital currency like China’s regardless of whether it is claimed to be aimed at reducing the dominance of top Chinese payment systems like Wechat Pay and Alipay to avoid a systemic problem if anything goes wrong. “Initially, it would be aimed at domestic consumers but it has global ambitions. The difference, in the case of China, is that if China says you can spend it here (it’s the world’s largest economy), that’s the final demand that can make it work. The advanced countries can still regulate it, say you can’t use it here, but there are lots of part of the world where China and the United States disagree over policies starting with countries US has financial sanctions on and I think indeed there’s going to be a global market for China’s currency.”
It could be speculated though that China’s digital currency has a cross-border objective as its promotion thus far has hinted at what the future might bring. Going by part of the information that emerged from the October 18 session at the World Bank IMF Annual Meeting, there were suggestions that China plans to use its digital currency in Africa and the Caribbean. Also, if the disclosure at their recent summit that the BRICS member countries – Brazil, Russia, India, China and South Africa – are considering issuing their own digital currency is anything to go by, a link could be established too.
“But, overtime, there is no reason – it is digital – that it can’t be used in North Korea, Iran, Russia, and I think, overtime, absolutely, it’s China’s ambition to challenge the dollar for global dominance at least among a set of countries and perhaps in the world’s underground market,” Rogoff maintains, stressing that the US and Europe can block China’s currency out within their borders but they can’t control its use abroad.
There is a view that Facebook could be creating a new world currency that is likely to rival the dollar, yuan or euro by having a coin for its more than two billion users. But Rogoff is skeptical that private currencies like Libra can create value long term because governments may have to regulate them at some point if they can’t observe their transactions like they do for credit and debit cards. And if they can be regulated, he adds, there is not likely to be much of a market for them.
On the view that governments won’t allow transactions they can’t observe, China comes in again. Rogoff says: “China can say, ‘We observe it. We don’t really care if you do. If you don’t like what we’re doing in Iran, too bad. They’d already said that. I think that’s where the real future battle lies between different governments with different views.”
It is worth noting that a simulation of China’s digital currency being used by North Korea to hide payments for arms and other sanctioned products as it successfully launched a warhead-tipped missile into the Philippine Sea near Guam was recently organized by the Belfer Center’s Economic Diplomacy Initiative.