#articles

China's rise to the international stage is for domestic audiences only

 

IMF adds China's yuan to SDR

On the 30th November the International Monetary Fund (IMF) decided to include China's renminbi in its basket of elite global currencies or Special Drawing Rights (SDR). The new weights place the Chinese renminbi (10.92%) behind only the US dollar and the euro in terms of importance, with the newcomer leapfrogging ahead of both the British pound and the Japanese Yen.

China's rising international status

The immediate impact of the decision is likely to be fairly limited with the new weights only coming into play from 1st October next year. Even without the delay, few goods or services are priced in SDRs and China's inclusion in the basket seems to be largely for show. Andrew Walker, the BBC World Service economics correspondent has said 'More than anything this move is a symbol - a powerful one - of China's meteoric rise, from poverty to pillar of the global economy.'

However, all the talk of China's new place on the international stage fails to appreciate the drama playing out at home. Far from the western perception of a well-drilled army of technocrats, marching to the beat of Beijing's drum, China's government suffers from the same entrenched interests that any political system does. 

Real impact is domestic

It is for this reason that Arthur Kroeber, Managing Director of GaveKal Dragonomics, has argued that Beijing's real motivation in pushing to join the SDR was not 'as many media reports inaccurately suggest, a desire to make the renminbi a major global reserve currency. Rather, it was to force the pace of China's own financial deregulation.'

At the weekly State Council meeting on the 4th December Xing Yujing, head of a monetary policy department at the People's Bank of China (PBOC), echoed these sentiments marveling at the remarkable and rapid internationalization of the renminbi 'especially over the last ten months.' This has been no where more prominent than this August when, on Tuesday 11th, China's shock devaluation of the yuan, weakened the currency against the US dollar by almost two basis points. The official explanation given by the PBOC was that the move was a 'one-off' adoption of a market based approach to setting the yuan's value. However, the widespread perception at the time was that this was actually a desperate bid to revive a flagging economy. Timing is everything, however, and despite the weak export data that had come out over the weekend, just the previous Tuesday the IMF had issued a report which stressed that, with regards to its requirement that the renminbi be 'freely usable', 'significant work' was still needed to be done. In fact, at the press conference announcing the yuan's inclusion, IMF Director Christine Lagarde emphasized that, 'the renminbi's inclusion in the SDR is a clear indicator of the reforms that have been implemented and will continue to be implemented'.

Chinese reforms: two speeds.

The significance of the yuan's inclusion in the IMF's SDR then, is not for the symbolism abroad but rather its role in catalyzing aggressive financial reforms at home. As the Paulson Institute's Houze Song has described, reforms in China are at two speeds 'moving fast in banking and finance... but very slowly, if at all, in the real economy.' The hope in central government is that opening up Chinese financial institutions to foreign competition will force them to be more efficient in their capital allocation and in turn raise China's productivity. For a country suffering from bloated SOEs and debt-laden 'zombie' companies, reforming the real economy remains a monumental challenge but perhaps, with a little international assistance, it can be done.


China's financial reform experiments

Premier Li Keqiang focuses on financial reforms.

On the 2nd December Premier Li Keqiang meets with Chinese economists to discuss policy reform. [Photo/China News Service]

On the 2nd December Premier Li Keqiang meets with Chinese economists to discuss policy reform. [Photo/China News Service]

On the 2nd December, Chinese Premier Li Keqiang hosted a forum of economic experts where he emphasized that supply-side structural reforms, particularly those relating to financial support, were the key to promoting innovation and unlocking sustainable economic development. 

5 pilot financial reform projects

Two days later, on the 4th December, the State Council held its weekly policy briefing with several senior members of the People's Bank of China (PBOC) in which they discussed their pilot projects in financial reform. The projects are part of a larger framework of economic policy experimentation aimed at developing the three main types of economic region in China:

  1. Developed eastern and coastal regions.
  2. Central regions undergoing industrial transformation.
  3. Under-developed western and ethnic border regions.
4th December State Council weekly policy briefing.[Photo/Xinhua]

4th December State Council weekly policy briefing.[Photo/Xinhua]

First, in Jilin province, northern China, agricultural reforms include cooperative finance schemes, house property mortgage loans, the development of internet services to promote ecommerce, the introduction of agricultural insurance and perhaps most notably 'land benefit guarantee loans' which involve agriculture-related asset securitization opening the way for financing via capital markets.

Second in Taizhou, a city in Zhejiang province which lies on the east coast of China just south of Shanghai, PBOC has conducted a pilot project for small/micro businesses. Reforms include improving direct financing channels, promoting a social credit system in local areas, enhancing cross strait financial exchanges, developing insurance schemes and improving financial regulation and risk prevention.

Finally, free-trade zones (FTZ), like the one successfully introduced in Shanghai, have been proposed in Guangdong (near Hong Kong), Tianjin (near Beijing) and Fujian (near Taiwan). The aim is  to increase cross-border use of RMB by creating the systems and regulatory environment that would allow institutions in these FTZs to take on foreign debt.

Future possible financial pilot projects include programs around technology finance, inclusive finance and green finance.

#fromthefrontier: Marc Andreessen on bitcoin

INTRO:

#fromthefrontier

News used to be about speed. Now it's about understanding.

Whether it's new technologies, changing policy or quickly developing news stories the modern world is becoming very complex. The problem is journalism hasn't adapted to the fact that it's no longer enough to just churn out the latest headlines, readers need a larger context to help them understand.

#fromthefrontier is a series of articles that:

  1. CONTEXT : a brief summary of the key ideas, concepts and history of the technology, market, issue etc.
  2. EXPERT: Gives the key views of an expert 
  3. UPDATES: Gives news updates from the expert

This article is on legendary Silicon Valley entrepreneur (@Netscape, @Opsware) turned venture capitalist (@Andreessen Horowitz) Marc Andreessen's opinions on the cryptocurrency bitcoin.


CONTEXT:

#bitcoin

 

Bitcoin is a new and alternative form of digital currency and payment system.

Historically, digital currencies have suffered from the double-spending problem where John might send the same digital dollar to both Alice and Katy without them knowing and thus 'double-spend'. Of course, physical currencies don't suffer from this problem because the transfer of the store of value involves the physical transfer of a coin or a paper note. Digital currencies solved this problem by having a centralized ledger run by a Visa or Mastercard where they would keep track of all the transactions to make sure there is no fraud or double-spending. In return for running this service Visa would take a cut on all the transactions.

Unlike other digital currencies bitcoin is decentralized and has a public distributed ledger called a block chain allowing users to transact directly (peer-to-peer) without the need for an intermediary. For this reason bitcoin is often referred to as a cryptocurrency which is a subset of digital currencies where cryptography (rather than a middle-man) is used to secure the transactions and to prevent fraudulent creation of new units. However, it should be noted that the ledger is maintained by third-party miners who are paid in bitcoins which creates a small inflationary effect on the value of the bitcoins.

Bitcoin was created by Satoshi Nakamoto, the pseudonym for an unknown person or team of people, who in 2008 wrote a paper called 'Bitcoin: A Peer-to-Peer Electronic Cash System' with bitcoin's software itself was released in early 2009.. 

Since then bitcoin has grown rapidly with the number of transactions in bitcoin rising from a few thousand per month in 2009 to more than a several million in 2015.

Number of transactions per month of bitcoin (logarithmic scale).

Number of transactions per month of bitcoin (logarithmic scale).

Nonetheless, bitcoin has been controversial with software problems, legal issues and perhaps, most significantly for investors, the price has been extremely volatile peaking to as much as $975.45 in Nov 2013 but falling off from that dramatically since.

Despite his bitcoin has slowly become more mainstream with companies like WordPress in November 2012, Chinese internet giant Baidu in October 2013 and Microsoft in December 2014 accepting the currency. Venture capital investments in bitcoin related companies has been increasing significantly and is on track to be even more in 2015.

For a good introduction watch this documentary 'The Rise and Rise of Bitcoin'.


EXPERT: 

#marcandreessen

 

At the heart of Andreessen's argument for bitcoin is the comparison that Bitcoin now looks a lot like personal computers in the 1970s and the internet in the 1990s. They too had lots of legal and regulatory problems, unproven commercial applications and highly uncertain futures but look how they turned out!

At a deeper level Andreessen's view is rooted in economist Carlota Perez's model of 'Technological Revolutions & Financial Capital' in which technological revolutions occur in two stages: the installation phase and the deployment phase. Crucially, whether it's steam engines, the combustion engine or bitcoin all new technologies in the installation phase are neither accepted or understood by the broader society which is still trapped in the thinking of the previous wave. It's only in the deployment stage that these technologies are adapted to and therefore their true is unlocked. The significance of this model for bitcoin, of course, is that Andreessen, as a venture capitalist and someone who is betting on the future, is looking for technologies that are in the installation phase because by the time they are in the deployment phase it is too late. 

This section is divided into three parts 1. Andreessen on bitcoin technology 2. Andreessen on criticisms of bitcoin 3. Andreessen on current and future use cases.

1. Andreessen on bitcoin technology

Bitcoin, like most widely used stores of value including gold and fiat money, is intrinsically valueless and is only useful if lots of people use and accept it. However, Andreessen argues that bitcoin is more than just a hyped up speculative asset because as the first practical solution to the so-called 'the Byzantine Generals Problem' it is a genuine breakthrough in computer science. The significance of bitcoin is that it provides a way for unrelated parties to trust each other over an untrusted network and transfer (not copy) a digital asset which could be anything from contracts, to passwords and of course money. This in turn means you can have a system of payments without a middle man and therefore no transaction costs.

2. Andreessen on criticisms of bitcoin.

There are several criticisms of bitcoin Andreessen disagrees with. 

  1. Bitcoin is too volatile. Andreessen argues that volatility is a function of speculation which has actually helped with adoption of the currency whilst the transaction use case is still weak. He concedes that in the long-run volatilty needs to be lower but as transaction volume increases when compared to speculative volume that should happen naturally. Also with derivative (hedging) and a wider acceptance of the currency should help stabilize things
  2. Black market/illegal activity. Andreessen argues this is over-stated and actually compared to gold, cash or diamonds digital currency is much more trackable because there is a ledger which anyone can see recording all the transactions.

He does concede though that:

  1. Bitcoin may not be the final form of digital currency and that some future cryptocurrency built on the block chain technology may replace it. 
  2. Bitcoin has a genuine chicken and egg problem that all networks have which is a currency isn't useful to consumers until merchants accept it but merchants won't accept it until consumers use it. Thus in the short-run, less revolutionary but better adapted to the current system systems like Apple Pay may at first win out.

3. Andreessen on the use cases of bitcoin.

Current uses case of bitcoin include:

  1. Speculation. As previously argued this may be how bitcoin gets around the chicken and egg problem before its primary use case as a currency emerges.
  2. Lower transaction costs. Without the need for a middle-man managing the ledger there are no need for transaction costs.  
  3. Bitcoin can be used just as a payment system without any exposure to bitcoin price volatility.
  4. Bitcoin can be used to prevent credit card fraud because the information transferred is related to the bitcoins not to the transacting parties.

Futures use cases of bitcoin include:

  1. Increased access to modern financial services both for unbanked people in the US and people in less developed countries, especially those with corrupt, unstable and undeveloped financial systems.
  2. The low transaction costs are particularly significant for international remittance where transaction costs can be very expensive.
  3. With limited to no transaction costs suddenly micro-transactions, tiny fractions of an american dollar in value are possible and could be used from anything a tiny cost to sending emails to preventing spamming to a way to determine who gets access to that car parking spot.
  4. Finally, the low transaction costs allow for a new way for charities and movements to easily and freely raise money for good causes.

UPDATES:

#marcandreessen

September 2015

Andreessen tweet.

  • He teases those who fail to see that the commercial value is in a technology's applications not the technology itself.

January 2015 

Andreessen delivers tweetstorm on bitcoin. 

  • Fights against three negative bitcoin arguments 1. bitcoin price fallen a lot 2. bitcoin is too volatile 3. not enough use cases.

November 2014

Andreessen's fellow VC at Andreessen Horowitz, Ben Horowitz at Stanford on bitcoin.

  • Explains the problem bitcoin solves and compares it to the internet.

October 2014

Andreessen at a Salesforce conference.

  • Admits to chicken and egg problems with bitcoin and long-term and high risk nature of the bet but argues that the reward makes it still worthwhile.
  • Cryptocurrency will definitely happen however.

March 2014

Andreessen at Pandomonthly interview. 

  • Admits to lots of legal issues, but argues bitcoin is a response to the over regulation of traditional finance, in the long-run more clamping down might make bitcoin even more compelling. Hasn't made a bet yet because conflict of interest issues mean they can only make one bet. 

January 2014

Andreessen writes in the New York Times about 'Why Bitcoin Matters'.

  • Includes how bitcoin works, rebuttals of criticisms, examples of use cases and speculation on the futures of bitcoin.