But an even more-important player is yet to show its hand. For China, Facebook’s plan to create a blockchain-based digital currency could prove to be an enhancer for its plans around the renminbi (RMB) – or a competitor. In ANZ Research’s opinion, it’s too early to rule out the former.
"Blockchain offers a fungible asset class option for China’s reserves investment, one which can be relatively independent of political considerations.”
Since Libra’s reserve basket may exclude the RMB, an increase in the usage of the former will undermine the usage of the latter. The mainstream view in China is for the People’s Bank of China (PBoC) to develop a competing digital currency – which ANZ Research understands is underway.
However, ANZ Research holds a slightly different view. Blockchain offers a fungible asset class option for China’s reserves investment, one which can be relatively independent of political considerations.
As a stablecoin, Libra is backed by a basket of currencies. If China creates a digital convertibility standard, this could potentially lift the global acceptance of RMB - making it a landmark event comparable to the Bretton Woods system launched in 1944.
Paved the way
China appears to have paved the way for the development of a convertible standard linked to a basket of currencies.
In the onshore market, after the PBoC established a currency swap agreement with a country, CFETS (China Foreign Exchange Trade System) would add that currency to its trading platform, which currently includes the Euro, Yen, Hong Kong dollar, Australian dollar, New Zealand dollar and the Korean Won, among others. In the offshore market, the CNH (externally traded RMB) is freely convertible with any currency.
A complementary strategy is to increase the popularity of the Chinese yuan (CNY - internally traded RMB) assets. In recent years China has made some progress, convincing a few global benchmarks to include the RMB in their baskets.
In 2016, the RMB was added to the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) basket. In April, onshore CNY bonds were included in the Bloomberg Barclays Global Aggregate Index, a global bond benchmark. JPMorgan is also planning to add CGB to its bond indices from February 2020.
Nonetheless, the above efforts have not been successful in lifting the renminbi’s status to a similar level as the US dollar - a safe haven choice even in a zero interest rate environment, like gold.
Global investors are attracted by the higher yield of CNY in an opportunistic manner rather than viewing it as a wealth preserving option. Even though China is the world’s largest exporter and commodity buyer, the RMB is still not the default currency in trade invoicing.
Even among Chinese exporters, the US dollar (USD) is still the preferred currency for accounts receivable as they need to naturally hedge their payable positions. USD/CNY trade still comprises up to 96 per cent of all spot transactions on CFETS.
This means a digital currency offers a whole new realm for China to consider - and Facebook’s Libra could be a prominent contender.
Secure, scalable & reliable
According to the company’s white paper, Libra is a cryptocurrency with several features:
- built on a secure, scalable and reliable blockchain;
- backed by a reserve of assets designed to give it intrinsic value;
- governed by an independent Libra Association consisting of 100 members tasked with evolving the ecosystem.
Facebook’s goal is to launch Libra by the first half of calendar 2020. The members will be from private institutions instead of governments.