Money is whatever people will use to swap, store and measure value. Since 1846, Hong Kong residents have relied on notes issued by commercial banks. And for almost four decades, they have been safe in the knowledge that 78 units of local currency would always fetch 10 U.S. dollars. That certainty has spawned a globally competitive financial center.
But change is on its way. The people of Hong Kong may be asked to try out a new kind of money. Whether they bite could decide the outcome of a great superpower rivalry.
A digital renminbi trial will start in Hong Kong, according to China’s Commerce Ministry, which is also planning similar evaluations in Shanghai, Macau, Beijing, Tianjin and the province of Hebei. The timelines aren’t clear, and an anonymous source cited by the official Xinhua news agency has denied any plan to broaden the current pilot. But money makes its own path. Once the tokens appear in popular Chinese wallets like Alipay, they’re bound to get spent in Hong Kong, with AlipayHK users hauling the sovereign coins back to mainland China.
This will be the most significant expansion anywhere of a prototype of cash that will reside entirely online. The programmable currency borrows elements of blockchain technology, and will be a part of the central bank’s base money. Unlike Bitcoin, the official digital yuan will be centralized. Making it succeed in Hong Kong, a laissez-faire economy anchored by a dollar peg, will also be the most crucial test yet of China’s preparedness to challenge American hegemony over global finance.
What began as a U.S.-China standoff on trade and intellectual property has become a wide-ranging confrontation, with the Asian financial center in the thick of it. The Trump administration’s sanctions against officials for what it sees as their role in eroding the city’s autonomy have had some effect: Hong Kong Chief Executive Carrie Lam is having trouble using her credit cards. The police chief transferred his mortgage from HSBC Holdings Plc to Bank of China (Hong Kong) Ltd. three days before he, too, ended up on the U.S. list of specially designated nationals, according to the South China Morning Post. (The newspaper cited police public relations as saying that Commissioner Chris Tang’s “personal consumer choice” wasn’t related to the sanctions.)
A digital yuan won’t foolproof Hong Kong’s future. The financial hub gained as the West and the People’s Republic became more interdependent. Now the gateway for two-thirds of investment going into and out of China has to get ready for a reversal. The virtual token can cushion the blow, for it can prepare the path for Hong Kong to eventually ditch the dollar.
In trials in Shenzhen, Suzhou, Xiong’an and Chengdu, the digital yuan has relied on banks for distribution. The People’s Bank of China gives out the tokens to state-run lenders, which transfer it to customers’ mobile wallets when, say, a municipality pays workers. However, this money isn’t part of bank accounts. A digital yuan transaction from Hong Kong can go global, bypassing both the dollar and the heavy fees of correspondent banking channels, which are under American surveillance and control. Payment can be received in Europe or America as private stablecoins such as the ones Facebook Inc.-sponsored Libra Association is planning.
In this scenario, Hong Kong’s existing currency peg will become a liability. But if residents have warmed up to the digital yuan, shifting the anchor to China’s currency would be easier. After analyzing patent applications, a recent Brookings Institution paper found that the People’s Bank can issue tokens that carry interest rates. This could be a new way for people like the Hong Kong police chief to take out mortgages — directly from the Chinese monetary authority.
To upend global banking and build an alternative that can accommodate China’s foreign-policy ambitions would be a costly enterprise. However, the Hong Kong chief executive’s credit-card woes are a wake-up call. If the cold war between Washington and Beijing intensifies, and China desires a sphere of influence beyond the reach of America’s financial might, it may have to fall back on its extensive blockchain infrastructure. Hong Kong then becomes a hub for borrowing and lending against digital assets, or taking out insurance that pays based on an algorithm’s say-so.
The digital yuan won’t offer the same anonymity as cash, and that could be a showstopper. With Hong Kong still digesting the implications of a national security law recently imposed by Beijing, users could have apprehensions about revealing their financial lives to Chinese authorities. That’s probably why the Xinhua report was quick to deny plans to pilot the tokens in the city.
Still, the planners must know that for the official crypto to make it globally, it has to succeed in the territory that’s been at the forefront of promoting the yuan’s international use.
A shock devaluation in 2015 followed by Beijing’s stricter capital controls stalled the momentum behind yuan internationalization. Although renminbi liquidity in the special administrative region has since shrunk by roughly 40%, daily real-time settlements backed by that pool exceeded 1.1 trillion yuan last year, 55% higher from 2014. Hong Kong converts as much of China’s money into foreign currency as London and Singapore combined. The city’s importance for the digital yuan can’t be overstated. This time around, it won’t just be a technical experiment. It will be all about the politics of money.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Patrick McDowell at email@example.com