China’s CBDC: paper tiger of crouching tiger?

[Economist Deconomy]Will China overtake U.S. to become the world’s No.1 economy? And if so, will the world face a crisis as anticipated by White House trade advisor Peter Navarro? It’s difficult to say that would be the case with certainty. But for certain, China has risen to become the world’s second-largest economy, surpassing Japan and the EU. And it is narrowing the gap with the world’s largest economy, the U.S. China has already exceeded U.S. in production and trade. And with a population of more than 1.4 billion, it is quickly catching up to the U.S. on consumer spending. The areas China falls far behind the U.S. are technology, capital and, especially, finance. But the Central Bank Digital Currency (CBDC), the digital currency issued by China’s central bank and aggressively pushed by the Chinese government, could become a game changer. The concept, system and objective of China’s CBDC, in five parts First, the CBDC is a proposed digital legal tender issued by the People’s Bank of China (PBoC) and backed by 1:1 fiat reserves, with manageable anonymity and encryption. Second, the PBoC is speeding up the launching of its own digital currency amid growing concerns over the weakening renminbi as a result of the continuing capital outflow and Facebook’s release of the Libra whitepaper. Third, CBDC applies a two-layered system on the issuance, redemption and circulation. In the first layer, the PBoC issues and redeems the CBDC through commercial banks. In the second layer, the commercial banks redistribute CBDC through retail networks. The first layer utilizes a centralized distributed ledger, while the second layer entrusts the corresponding financial institutions and network. Fourth, China’s CBDC has adopted various systems that would not require a bank account to transfer money. Lastly, the PBoC will be able to raise the effectiveness of its monetary policy through the digitalization of the renminbi and have a better grasp on the activity of individuals and businesses. Its final goal is to expand the renminbi’s global reach. Reason China will win in the race to become world’s No.1 British economist Niall Ferguson predicts China will overtake the U.S. In his book “The Square and The Tower”, he said today’s network competition has been reorganized to be one pitting Silicon Valley against the Chinese government and the BAT (Baidu, Alibaba, Tencent) companies. The Chinese government already has the Hukou (family registration) and Dang’an (personal records) systems. Ferguson said when combining this data with data accumulated from BAT companies’ networks, China will establish the most powerful centralized control system ever. China’s CBDC will become a powerful component of the centralized control network, and through the concentrated power, China will outmaneuver the U.S. and the world. China’s President Xi Jingping’s strategy today still follows Deng Xiaoping’s Tao Guang Yang Hui philosophy of building up one’s skills without exposing oneself while carefully waiting for the right moment. However, within China, there is increasing mention of “Daguo Jueqi,” which translates to the rise of great nations. The moment Xi officially announces Daguo Jueqi is seen by Navrro as the moment when the crouching tiger roars. And the powerful fangs of the tiger will be China’s financial network centered on the CBDC.

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