Digital renminbi vs. the dollar

The Big Story

China takes on America's 'dollar hegemony'

U.S. lawmakers asked Federal Reserve Chairman Jerome Powell in late March about China's centrally-backed digital renminbi, otherwise known as eCNY. China's central bank, the People's Bank of China, has been rolling it out in test markets across the country, and American observers are starting to worry about what it could mean for the U.S. dollar. As POLITICO reported last week, Powell made clear he's in no rush to launch a U.S. centrally-backed digital currency to compete with Beijing's. But maybe he should be.

The eCNY is nothing like Bitcoin or other cryptocurrencies. This is not an independent challenge to government power by financial renegades; instead, it's a further centralization of Beijing's power.

• The eCNY is a digital currency controlled by the central bank that generates an image on a smartphone that looks a lot like an actual RMB note, complete with a picture of Mao. It gives the state huge control over policy, and the way consumers use it, in a way that isn't really possible with regular money. For example, according to a new Wall Street Journal report, authorities can set some eCNY to expire to juice the economy, or manipulate the value to ensure it doesn't fall out of line with paper RMB notes.
• And privacy isn't at a premium, although a PBOC official has promised "controllable anonymity," according to the Wall Street Journal. Beijing likes being able to track purchases in order to know what's happening in the Chinese economy, levy taxes, stifle corruption and of course, to have the surveillance capability that comes with knowing who spends what, where and when.

Right now, the U.S. dollar reigns supreme. Nearly 90% of global trade is settled with the good old greenback and it's the favored reserve currency used by banks around the world.

• This creates a huge network effect; everyone uses U.S. dollars because everyone else uses U.S. dollars.
• The dollar's wide use gives a remarkable degree of extraterritorial control to U.S. authorities when they want to levy sanctions, and it makes it easy and cheap for the U.S. to borrow money.

China's not about to dethrone the champ. Beijing has a long history of currency manipulation, and it's currently quite hard to exchange the RMB for any other currency. In contrast, the U.S. dollar is freely convertible and the global market sets its value.

• U.S. capital markets are also open, liquid, deep and trusted; it's much harder to take a pile of RMB and invest it in RMB-denominated assets like Chinese stocks.

But the U.S. shouldn't underestimate the eCNY and the long-term disruptive effects it could have.

• We live in a world of "dollar hegemony," which refers to America's influence over the international financial system. China has a vested interest in chipping away at this, and is the rare nation with the resources to do it.
• The eCNY could be attractive to actors at the margins of the global financial system who want to, say, avoid U.S. sanctions. Authoritarian governments could eventually view the eCNY as a way to exert greater control over their own citizens by adopting it internally.
• Any rearguard attack on the U.S. dollar could take decades to succeed, but that's a historical blip. Network effects can collapse much as other entrenched advantages do; gradually, then all at once.

Not everyone in China is on board with eCNY, though. Some voices on Chinese social media have called it a "digital food coupon," harkening to the dark days of Mao Zedong and food rations, since the government has so much control over each note in a way it never has with paper cash.

On Protocol | China

• Your favorite startup might have its engineers in China. U.S. companies don't like to talk about it, but they frequently outsource work — often to China, where programming talent is abundant and (relatively) cheap. The median annual wage for a Chinese coder is less than $40,000, versus about $107,000 for engineers based in the U.S. Some companies are putting their entire R&D teams in "second-tier" Chinese cities like Chengdu or Fuzhou, despite geopolitical tensions. Shen Lu has the scoop.
• Everything you need to know about the WeDoctor IPO. The medical booking-and-service platform is valued at nearly $7 billion and set to IPO in Hong Kong. Impressive, but with 145,000 subscribers it's just scraping the tip of the giant iceberg of a potential market: China is aging rapidly, and 300 million people in the country already suffer from chronic disease. Zeyi Yang breaks it down.

Big Brother Beijing

• Bid "zai jian" to off-brand EVs. Remember the fun, cheap, unregulated, tiny electric cars that fill up the streets in Beijing? They're disappearing. These off-brand electric cars that cost as little as $600 used to live in a legal grey area between mopeds and cars. But China's Ministry of Industry and Information Technology said late last month that a new national standard will come out in September that treats these tiny cars like any other EV. They will have to pass (stricter) safety tests and driving one may require a driver's license. With the policy changes imminent, tiny cars are suddenly impossible to buy in Beijing, reported financial outlet AI Caixing.
• Beijing is cracking down on smuggled gaming consoles. Again. Last week, Chinese customs authorities announced they'd intercepted goods from 13 console smugglers who had sold over $500 million worth of devices and games since 2018. For decades, with most consoles either banned or heavily censored, Chinese gamers have relied on smuggled consoles to play their favorites. The latest crackdown sent shockwaves across ecommerce platforms. Console sellers quickly removed their listings, even for products that are allowed in China, reported BJNews. "Most vendors are selling smuggled versions and the sources are dubious," one unnamed vendor said. "So they won't stand up to scrutiny."

One Company You Should Know

Energy Monster powers China's cell phones

Energy Monster, which leases portable power banks for mobile devices in restaurants, shopping malls and other public locations across China, went public on Nasdaq on April 1 after pricing lower than expected. The company is China's biggest shared battery operator, taking up 34.4% of the market, according to the 21st Century Business Herald. Alibaba was Energy Monster's biggest shareholder prior to its IPO.

Straight From China's Web

• A new nationalist collector's item: shower shoes. A surge in nationalist sentiment has led Chinese consumers away from big, international sportswear brands like Nike and Adidas and toward domestic sportswear companies like Li-Ning. Even sneakerheads in China who usually worship limited edition Nikes have followed suit, and the secondary market app known for international brands, DeWu (得物), even yanked Nike products from its platform. As a result, the price of Li-Ning shoes has skyrocketed, with the price of one pair of L-iNing sneakers increasing 17 times on the secondary market. Even a pair of plastic, slip-on Li-Ning shower shoes jumped from $42 to $114.
• Will China bring about a global healthcare revolution? Eventually, says Neil Shen, Sequoia Capital China's founding and managing partner. In a recent talk with Stanford computer scientist Fei-Fei Li and others, Shen said that while China is playing catch-up with the U.S. in the IT-meets-biotech field, innovation in the Chinese market will eventually go global and change health care forever in the process. Sequoia China has invested in more than 180 medical tech companies in the past 15 years, harvesting nearly 30 medtech IPOs.
• Meet China's "private traffic" king. You might think you're in too many group chats, but you're not — at least not compared to Austin Li, China's second-highest grossing livestream influencer on shopping platform Taobao. According to Chinese digital outlet Weiguojiang, Austin Li's team has organized over 5,200 separate WeChat groups to promote his ecommerce livestream activities. Each WeChat group maxes out at 500 people, and even if Li's each have only 200 members that means he can instantly reach the message boxes of one million followers. It's part of Chinese tech's obsession with "private traffic," which refers to loyal, recurring followers or users.

China Goes Global

Outside the U.S., TikTok's biggest competitor is another Chinese company. On March 26, the Guangzhou-based Joyy released its unaudited financial results for 2020. After selling off two of its domestic businesses to Tencent and Baidu, Joyy has largely become a global company with its livestreaming platform Bigo and short video platform Likee, both immensely popular in South Asia and Southeast Asia. Joyy made $2 billion in revenue last year and reached 393.7 million active users worldwide, despite being banned in India over the summer. CEO Xueling Li also said Bigo was entering the Middle East and other developing markets.

One More Thing

Chinese tech is drowning in corporate blather

China's tech industry has developed a unique claptrap-filled lexicon that has drawn ire from insiders such as ByteDance CEO Zhang Yiming. A Shenran Finance post about the jargon — titled "As an employee of a big factory [i.e. big tech firm], why don't I talk like a human?" — elicited a wide reaction on China's web last week. Tech workers, especially those new to the industry, hate the lingo, which makes no sense to outsiders. Some jargon is industry-specific: "user perception" (用户感知), "closed-link loop" (链路闭环), "bottom-level logic" (底层逻辑) and "top-level thinking" (顶层思考). Others are specific to a tech company: 325, for example, means "needs improvement" within Alibaba, based on the company's performance-review scoring system.