China’s secret weapon in trade wars is a cryptocurrency targeted at the dollar

China has a secret weapon — at least the purpose of its weapon is a secret — it’s the financial equivalent of a cruise missile, it’s called a cryptocurrency, and the US is in its sights.

Article updated: 30 August 2019 10:00am Author: Michael Baxter

The US and China are at trade war. No one is likely to win in the short run, but even if the US President can ever claim victory, history will show it was a pyrrhic victory — named after the Greek general who won a battle against Rome at such a price that it cost Greece the war.

I said above that China has a secret weapon, actually it has two. But they are only secret in the sense that the rest of the world are oblivious to their significance. The weapons are:

  • Its planned cryptocurrency.
  • AI.

I will reserve the AI part of this discussion for another day.

At this stage the details of the cryptocurrency are little more than a rumour, Chinese officials have merely discussed it in broad terms. This week, rumours appeared in the press related to how the currency will operate.

The Chinese state will sell the currency to a select number of its largest companies including Tencent, Alibaba, The China Construction Bank, The Industrial and Commercial Bank of China, The Bank of China, The Agricultural Bank of China and Union Pay. 

These companies will then distribute the currency.

I guess, before I go any further, I should explain what a cryptocurrency is. Usually when we use that word we think of Bitcoin or one of the other blockchain based currencies. The Chinese cryptocurrency will be similar, but different. It will use a system not dissimilar to bitcoin, whereby a record of all transactions using the currency will be stored across multiple computers. In this way, it is almost impossible to change this record, as to do so you would have to change the record across multiple computers. The records on Blockchain or cryptocurrencies are meant to be immutable.

I read that the Chinese cryptocurrency won’t technically be blockchain, because blockchain refers to a specific way information is stored — in blocks. But I am cynical about that particular claim, my understanding is that it is very hard to have a cryptocurrency which doesn’t use some form of blockchain.

Don’t confuse the Chinese currency with bitcoin, however. In fact, bitcoin suffers from major flaws and represented a triumph of hype over reason. The Chinese cryptocurrency will not have the same flaws.

The rationale behind the currency will be quite different from rationale behind bitcoin. Whereas bitcoin is a libertarians dream, because it isn’t controlled by a central bank and offers anonymity, the Chinese cryptocurrency will be controlled by Chinese authorities and one of the benefits it will offer China is the ability to spy — the surveillance state extended to how Chinese citizens spend their money.

China is not unique. The Bank of England has mooted the idea of a blockchain currency and Facebook has revealed it’s own version — Libra.

But the Chinese version has two massive advantages — the advantage one being the fact that the Chinese state is backing it. The second being that it will be the first cryptocurrency of this type to market.

But China’s real target is the dollar and dollar hegemony. It wants its cryptocurrency to be used globally.

The US dollar is the global currency of default. And the US benefits enormously. Because dollars are held as currency reserves around the world, the US can pretty much do as it likes with the dollar. It can print dollars, use the currency to buy foreign goods, but because these countries hold dollars, they are forced to cut their own interest rates causing inflation. In other words, dollar hegemony means the US can export inflation.

In a smaller way the UK, Japan and Euro area can do this too — all these countries/regions conduct trade in their own currency. Take British foreign aid, for example. Because the UK provides aid in Sterling, the money it provides eventually finds its way back to Britain.

The end of dollar — and lesser extent sterling, euro and yen — hegemony, would significantly weaken US, and to a lesser extent, British, Eurozone and Japanese, influence.

The rise of a Chinese cryptocurrency would cement China’s influence in the world, reducing its trade war with the US to little more than a side-show.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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