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Yet again, China has gotten an edge over the U.S. — this time in virtual currencies. The central bank’s snazzy digital yuan could be a threat to dollar primacy, and, if the Federal Reserve fails to match it, the U.S. will fall dangerously behind in an entirely new area of superpower competition.
Or so some contend. In fact, the opposite is true. Beijing’s policy toward virtual currencies — especially the crypto kind — is making it an outlier, not a leader, and cutting the economy off from a major new trend in international finance. Without a shift in approach, China could well be the one that gets left behind.
The same can be said with many aspects of current economic policy. Beijing’s distrust of cryptos is indicative of the government’s greater and growing wariness of private enterprise more broadly — as investors learned all too painfully in a recent crackdown on big tech and other sectors that tanked Chinese stocks around the world. What’s going on isn’t “state capitalism” as usual, with bureaucrats intruding on the market, but a fundamental revision of the relationship between the state and private sector, with long-term consequences for China’s position in the global economy.
China’s crushing of cryptos is another piece of that story. Authorities banned banks and finance firms from providing Bitcoin and other cryptocurrency services and shut down most mining operations, tipping off a mass exodus of equipment from the country. While some other governments have acted to curtail cryptos, including Turkey’s, no major economy has gone so far as China’s. The Indian central bank tried to prohibit financial institutions from the virtual currency business, but the attempt got shot down by the country’s top court last year.
Perhaps China is simply being cautious with new and uncertain financial instruments, and prefers to expend energy manufacturing cars, not Bitcoins. Personally, I’m not sold on cryptocurrencies, either. I have yet to hear a convincing argument for why Bitcoin should be valued at $60,000 or $60.
Still, by taking such stern action, Beijing is isolating the economy from an emerging financial sector and the potential innovation, entrepreneurship, and wealth it can create. It means there won’t be local competitors to firms like COINBASE Global Inc., now worth over $50 billion, nor will Chinese investors and consumers be able to participate in the profits and some of the services generated by the crypto craze.
Instead, they’ll be left with the digital yuan, which is essentially the opposite of a cryptocurrency. Rather than being decentralized and independent, it’s firmly under the thumb of the People’s Bank of China and can be utilized to exert even more state control over the economy by making it easier to track transactions and spending. By contrast, the Fed might move in a very different direction. Vice Chair Randal Quarles recently downplayed the need for a formal digital dollar and instead favored private-sector innovation in virtual currencies, such as stablecoins.
Perhaps some new firms and ideas will pop up around the digital yuan once it becomes more widely used, but those creations will likely remain primarily local. The yuan’s digital version will probably face the same hurdles as the old-fashioned one to gaining an international audience — mainly, the lack of access to yuan assets caused by capital controls. A July report from research firm Capital Economics concluded that the so-called e-CNY “will do nothing to relax the constraints that have prevented the renminbi being widely adopted in international trade or as a reserve currency.”
This adds up to a China trapped in its own digital currency universe. While the rest of the world is trading Bitcoin and Ethereum, the Chinese will be left on the sidelines, passing the digital yuan largely among themselves, or at least in transactions the state can control. It’s just one signal that policy makers have little intention of lifting the controls and prohibitions that shield the financial sector from global capital markets. Beijing’s heightened scrutiny of overseas initial public offerings in the wake of ride-sharing service Didi Global Inc.’s New York listing will likely block many local firms from foreign exchanges — yet another insular step for Chinese finance.
More importantly, China’s crypto crackdown is part of a larger, worrisome trend toward isolation. Sure, the economy remains highly integrated with the rest of the world. International companies continue to invest eagerly in the China market (though the bloodletting of recent weeks may scare off some foreign capital). But in many respects, cyptocurrencies are more representative of its true direction — one that limits, and even reverses, intermingling with the global economy.
The domestic market is big enough for local firms to flourish, including in the digital currency space. But if China is ever to displace the U.S. as the world’s indispensable economy, Beijing will have to embrace, not shun, emerging global trends. The country can’t be a leader if Chinese are forced to invest, shop and use technology differently from nearly everyone else. In the end, if Beijing can’t adapt to change in the global economy, it certainly won’t shape it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Michael Schuman at [email protected]
To contact the editor responsible for this story:
Patrick McDowell at [email protected]
