Hello, China Watchers. Your guest host this week is Emily Parker, a managing director at CoinDesk, a news site specializing in bitcoin and digital currencies, and co-anchor at CoinDesk TV. Emily is a former member of the Policy Planning Staff at the U.S. State Department and a former writer and editor at the Wall Street Journal, where she covered Asia. Her book, “Now I Know Who My Comrades Are,” (FSG) details the impact of the internet in China, Cuba and Russia. She’s also co-founder of LongHash, a blockchain startup that focuses on Asian markets. Over to you, Emily! – Ben Pauker, world and national security editor
Former President Donald Trump liked to present himself as tough on China. But it’s starting to look like U.S.-China relations could be even more strained under the Biden administration.
For starters, some China policies might not be that much of a departure from Trump’s. Take trade: under Trump, the U.S. imposed tariffs on around $370 billion worth of Chinese goods annually. Biden’s U.S. Trade Representative Katherine Tai just made it clear that the U.S. will not be lifting China tariffs anytime soon.
But this is more than Joe Biden just following Trump’s path. The Biden administration could end up incurring greater wrath from Beijing. Because while Trump was relatively isolated on the world stage, Biden will not be acting alone. Following a tense meeting with Chinese officials in Alaska last month, the United States placed human-rights sanctions on China in coordination with Canada, the European Union and the United Kingdom. Now, as Japanese Prime Minister Yoshihide Suga prepares for his first summit with Biden on April 9, Japan is under pressure to join these sanctions as well.
The U.S joined another multilateral effort in response to the just-released World Health Organization-China report on the origins of COVID-19, which ultimately found that the origins of COVID-19 were … unclear. Many countries found this conclusion to be unsatisfying. The U.S., along with 13 other countries, issued a joint statement saying that the report was late and didn’t have access to complete data.
But if Biden’s plan is to form an “alliance of democracies,” China will seek alliances of its own, the New York Times wrote on Monday. “The world is increasingly dividing into distinct, if not purely ideological, camps, with both China and the United States hoping to lure in supporters,” the article said.
China’s new agreement with Iran offers a hint of how that future might look. The $400 billion deal entails China receiving oil in exchange for its investments, and notably, the establishment of an Iranian-Chinese bank. Relatedly, Russian Foreign Minister Sergey Lavrov recently traveled to China to complain about American sanctions and the world’s reliance on the U.S. dollar.
As it turns out, China is already working on a solution to those problems.
DIGITAL YUAN TO TAKE ON U.S. DOLLAR
China is moving quickly to launch a digital yuan, potentially replacing cash domestically and challenging the U.S. dollar globally. Goldman Sachs predicts that within 10 years, the digital yuan could reach 1 billion users.
Is Washington even taking this seriously?
Despite a constant flurry of China headlines, top U.S. policy makers are largely silent on the digital yuan. Biden has not mentioned it in any significant way. To be fair, over the past year the U.S. has been distracted by a pandemic. But during that same period, China has been working to get its digital currency off the ground. Chinese banks have given away millions of dollars to incentivize users to make payments with the digital yuan through pilot programs across a number of major Chinese cities.
China’s central bank digital currency, also known as CBDC, DCEP or eCNY, is essentially a digital form of cash that can be used for everyday purchases, like groceries. The digital yuan is often referred to as a kind of homegrown cryptocurrency. But make no mistake, it will be nothing like bitcoin, the world’s leading cryptocurrency.
Bitcoin is not backed by any government or central bank, while the digital yuan is supported by the People’s Bank of China. Bitcoin is a relatively private form of payment in that it allows for pseudonymous transactions. By contrast, some fear that the digital yuan will make it that much easier for the government to monitor citizen transactions. Just last week, the People’s Bank of China admitted that a fully anonymous digital yuan is not “feasible.”
So why should America care about any of this? Because China’s digital yuan ambitions are not just a domestic project. China has been quietly planning to take the digital yuan global, as my colleague David Pan recently reported. That means that aside from making payments much more efficient domestically, the digital yuan could challenge the supremacy of the U.S. dollar.
In a recent CoinDesk TV interview, Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC) told me that a digital yuan would present the opportunity to bypass the global bank-based system and allow China to make direct payments to other countries, diminishing the impact of U.S. sanctions.
“The Iranian Chinese bank could very well be a conduit for eCNY,” said Tavni Ratna, founder of Policy 4.0, a think tank focused on the digital asset space. “It would serve as an offshore yuan clearing bank.”
The U.S. does not demonstrate the same urgency about rolling out a digital currency, to put it mildly. Last week, Fed Chair Jerome Powell made it clear that the U.S. is in no rush to issue a digital dollar, and would only do so with widespread political and public support.
“You can expect us to move with great care and transparency,” Powell said. In other words, don’t hold your breath. Interestingly, Powell also said that a U.S. digital dollar would need greater privacy protections than a digital yuan.
We don’t know exactly when China will officially launch its digital yuan, but it could make an appearance at next year’s Beijing Olympics.
Of course, China already has a sophisticated digital payments system, thanks to services like WeChat Pay and AliPay. According to one estimate, in 2018 $67 trillion in transactions were conducted in China on mobile devices, many through Alipay and WeChat. But that’s kind of the point. It’s no secret that Chinese authorities have grown uneasy with the growing power of payments giant Alibaba. China suspended Alibaba’s $34 billion IPO and more recently asked the company to give up its media assets. The digital yuan is quite possibly another attempt to curb its influence.
This is not to say that no one in the U.S. is paying attention. In 2019, a group of high-ranking former policy makers conducted a wargaming exercise in which they simulated threats posed by a Chinese digital yuan. In one scenario, North Korea uses digital Chinese currency to buy materials for a missile test. Notably, one of the participants in this gaming exercise was Gary Gensler, soon-to-be chairman of the Securities and Exchange Commission.
The U.S. and the world has derived great benefits from having the dollar as a global reserve currency, Sen. Cynthia Lummis (R-Wyoming) recently told me on CoinDesk TV. If China’s digital yuan became widely used around the world, the U.S. dollar could risk losing that preeminent status.
It could even lead other countries to start considering a basket of currencies, including digital ones, as the new world reserve currency, Lummis said. “The British pound used to be the world reserve currency. And when it no longer was, the British pound really, really took a dive. So we should do everything we can in the United States to protect the dollar as the world reserve currency.’”
There’s a lot we don’t know about China’s digital yuan, including how widely it will really be adopted. But this is a story worth watching, especially in Washington.
And now for more programming, here are POLITICO’s Doug Palmer and China Watcher contributor Shirley Martey Hargis…
U.S. CALLS OUT CHINA OVER “HARMFUL TRADE PRACTICES”: The Biden administration criticized China as the biggest source of global excess capacity in sectors such as steel, aluminum and solar energy, and promised further action “to address these harmful trade practices,” Palmer reported Wednesday.
The tough talk was another sign that trade relations between the world’s two largest economies will remain fraught.
The Office of the U.S. Trade Representative made the statement as part of its mammoth annual National Trade Estimate Report on Foreign Trade Barriers. The section on China runs more than 30 pages, second only to the chapter on the European Union.
U.S. AND G7 PARTNERS TAKE ON CHINA: Top trade officials from the world’s leading democracies on Wednesday took aim at China in a joint statement pledging collective action to address “harmful industrial subsidies” and other market-distorting practices, Palmer reports.
The trade ministers also echoed President Joe Biden’s goal to “build back better” from the Covid-19 pandemic and underscored their commitment to make progress this year on WTO reform and other trade areas, including climate, the digital economy and creating more opportunities for women.
The G7 includes the U.S., Germany, the U.K., France, Canada, Italy and Japan. The joint statement did not mention China by name, but concern about the country’s trade practices was evident in a section on industrial subsidies. China’s generous support for its domestic companies is a major sore spot for Western economies.
TAIWAN AND U.S. FORGING CLOSER TIES: U.S. Ambassador to Palau John Hennessey-Niland’s visit to Taiwan over the weekend was the first by a U.S. ambassador in an official capacity in more than 40 years. It was the latest in a string of developments that suggests Taiwan is playing a larger role on the world stage and its relationship with the U.S. is continuing to evolve, Hargis reports for China Watcher.
Randall G. Schriver, Project 2049 Institute’s chairman and former assistant secretary of Defense for Indo-Pacific Security Affairs, told Hargis that he believes Taiwan is being viewed as “an important partner in its own right, not just a subset of U.S.-China relations.”
Consider developments of the past 12 months: Biden called on Taipei to increase supplies of chips to help head off a semiconductor supply chain crisis; the country’s de facto ambassador in Washington was invited to Biden’s inauguration; Taiwan won praise for its handling of the coronavirus pandemic; and high-level discussions are ongoing with the U.S. after the August visit of then-Health and Human Services Secretary Alex Azar.
Also, there was optimism in Taipei after Secretary of State Antony Blinken pledged to push for a free trade agreement between the two countries. Not to mention that there were reports that Biden would invite Taiwan to his upcoming Democracy Summit.
“We are seeing more normal contact and engagement with Taiwan, not to poke a finger in the eye of Beijing,” Schriver said, “but because Taiwan is important to us in its own right.”
Thanks to: Editor John Yearwood, Ben Pauker, Shirley Martey Hargis, Doug Palmer, Luiza Ch. Savage and Matt Kaminski.
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