China needs to be prepared to cope with Libra amid yuan internationalization

By Li Daokui Source:Global Times Published: 2019/8/22 21:26:46

Illustration: Luo Xuan/GT

Facebook recently released a white paper for Libra, its newly created cryptocurrency, and co-founded the Libra Association. Given that Facebook already has over 2 billion monthly users, the launch of Libra will bring challenges to the current monetary system, macroeconomic management and financial supervision. 

Libra, unlike other cryptocurrencies, has a stable currency value and is convenient and safe to use in cross-border transactions. In fact, Libra is in many ways the same as Alipay and WeChat Pay. The difference is that Alipay and WeChat Pay are directly pegged with the yuan - 1 yuan in an Alipay or WeChat Pay account equals 1 yuan of fiat money - while Libra is pegged with a basket of currencies. This difference indicates Libra is an independent currency, and one that could very well grow into an important super-sovereign currency.

Libra is based on other major currencies around the world. So far, Facebook's money move has not triggered hostility from central banks, yet there is a possibility that the management of Libra will become a complicated geopolitical issue under specific circumstances. 

It is possible that, in some cases, powerful countries may force Facebook to intervene in the transactions of other countries, or even freeze or confiscate Libra accounts based in those countries. Alternatively, considering Facebook's current ability to influence public opinion, the giant could perhaps use Libra to paralyze a country's economy.

Another issue worth noting is that once a growing number of financial companies start to use Libra in their transactions, more financial assets will be priced in terms of Libra. It is not hard to imagine that, when the world's economic and financial systems face fluctuations, major countries around the world may require Libra to adjust the rules of Libra's circulation and transactions in order to expand or shrink the cryptocurrency's issuance. The Libra association would, in this case, become a super central bank with its own independent monetary policy, and Libra would become an independent currency. Central banks worldwide are well aware that Libra has this potential. 

Suppose the Libra Association and Libra run like a central bank and an independent currency. Who will determinate a monetary policy? What will the goal of this monetary policy be? Which country's or region's economic situation will be Libra's reference? 

There are two fields in which Libra has the most potential for success. The first is in countries with fragile economies, where the people do not believe in their currencies. People in such countries may rather use Libra to save and as a measurement of value. Libra is expected to become a daily-use currency in these countries.

On the contrary, in developed regions such as the EU and the US, Libra is unlikely to replace existing currencies. This is down to the fact that Libra does not represent an equivalent domestic currency, and will create issues for users who are confident in, and refer to, the value of the currency regulated by their own central banks.

The second field that Libra will likely see success in is cross-border transactions. Libra has found a way out of the current complexity of such transactions via the convenience of the internet. For this reason, many financial companies have filed requests to join the Libra Association. In this sense, Libra is expected to have an edge in pushing forward economic and financial globalization.

As the birth of super-sovereign currencies is at this point inevitable, China should take advantage of WeChat Pay and Alipay, among other technological innovations, to increase the cross-border use of the yuan and accelerate the yuan's internationalization. The nation should also take an active role in the operation and management of Libra, to establish a foothold in the future international currency battlefield.

China should stick to the principle that Libra is not allowed to be used in domestic trade so as to maintain sovereign currencies' unrivalled positions.

Chinese regulatory authorities should also declare in advance that cross-border trade of Libra can be limited in emergencies, in order to prevent capital flight and economic crises. 

In addition, as a great power, China must consider permitting its major firms to join Libra's governing body. Instead of rejecting Libra's potential, China might as well join it and participate in its rule setting. 

There is a small chance that Libra will evolve into a new currency similar to the IMF's Special Drawing Rights (SDR). Since China has taken an active role in IMF and SDR operations, why can't it join Libra's governing body? They are essentially the same. 

On top of that, China has supersized social networking and e-commerce platforms, which should be encouraged to push for their own digital payment tools as part of their internationalization drive, so as to increase the yuan's clout in international trade. It is only once the home currency is strong enough that the nation will be capable of getting involved in the future issuance of international currencies. 

China should be sober-minded and realize that the yuan, however globalized it becomes, will remain the sovereign currency, while the creation of super-sovereign currencies is inevitable. The odds are low that China's local financial institutions and businesses will launch super-sovereign currencies, taking into account restraints on online transactions and cross-border trade. Therefore, China ought to cope with super-sovereign currencies in an active and pragmatic manner, amid its push for the yuan's internationalization.

The author is director of the Academic Center for the Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University and chief economist at the New Development Bank.


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