China’s banks have loaded up on debt for years to fuel their expansions. However, China’s indebted banks are now starting to threaten China’s economic growth outlook. A heavily-indebted banking sector was one of the reasons why China has appointed a new head of banking regulations, named Guo Shuqing, who has been introducing a broad range of new regulatory directives to improve the banking sector in the year and a half he has been in the position.
Banking Regulatory Commissioner Guo’s primary focus in his new position is to stamp out the massive shadow banking sector that has taken over China in the last ten years. Also, off-balance sheet asset management products have reached $9 trillion in the People’s Republic, which could lead a severe liquidity crisis should banks start to experience issues selling their debt. Given the increase in non-performing loans and decreasing profit margins that Chinese banks are facing, this is a grave concern for Guo.
Another potential challenge on Guo’s agenda is the Chinese central bank’s initiative to launch its national cryptocurrency, which could end up becoming a threat to the current banking system.
PBoC to Issue Own Digital Currency
The People’s Bank of China (PBoC) is in the process of developing a Bitcoin-like digital currency linked to its sovereign currency and built on top of its own blockchain. Given China’s affinity with digital and mobile payments, through apps such as Alibaba’s Alipay and Tencent’s WeChat, issuing a digital currency pegged to its fiat currency that allows users to make low-cost digital payments makes business and economic sense from the PBoC’s point of view. A digital currency like this, however, could be another threat to the banking system that already has troubles keeping up with digital payments players from the tech sector.
Should a new ‘bityuan’ become widely adopted across the People’s Republic, then monitoring capital flows, credit creation and even spending patterns would be greatly enhanced for the Chinese central bank. This would, therefore, curb corruption and money laundering in the country, which is high on the regulator’s agenda and would allow for more efficient monetary policy implementation.
OKCoin’s Duan Xinxing told Bloomberg that he believes if the PBoC implements a blockchain-based digital currency, “the central bank will have unprecedented knowledge of how the economy runs. The transparency of economic activities in every corner in the country will significantly improve,” as the PBoC will be able to gather "real-time, complete and authentic" data on all financial transactions within China’s borders.
Will the New ‘bityuan’ Replace Bitcoin as China’s Number One Cryptocurrency
Should the PBoC’s digital currency experiment turn out to be a success and all digital payments in China will be conducted using the new ‘bityuan,’ it begs the questions of whether Chinese regulators would still allow the holding, buying and selling in bitcoin or any other cryptocurrencies that are not the ‘bityuan?’
As we have been able to witness again since the beginning of 2017, the PBoC keeps a close eye on bitcoin trading activities in the country. It is currently investigating the three largest Chinese bitcoin exchanges for potential market manipulation, money laundering, and unauthorized financing and, at the beginning of February, the PBoC even threatened to close bitcoin exchanges that violate any of the country's currency regulations, which has led to a withdrawal halt at several leading bitcoin exchanges.
The Chinese regulator’s concerns surrounding bitcoin are its riskiness as an investment, which could potentially hurt Chinese retail investors and the potential of using bitcoin to circumvent capital controls in the country. With bitcoin, you can send and receive money across Chinese borders, which is not the case with its sovereign currency, the yuan. Should the Chinese regulator consider the latter to be a serious threat to its capital controls, a ban on the use of bitcoin could be on the cards. However, no such indication has yet been made by the Chinese central bank.
Will the ‘bityuan’ Negatively Impact the Chinese Banking Sector?
It would be unlikely for the Chinese central bank to create a digital currency that would circumvent its own banking system in the way that bitcoin does. The most likely scenario will be that the PBoC will issue its new digital currency directly to banks, which in turn will deposit them in account holder’s accounts.
However, over time, it would not be too far-fetched to assume that merchants would want to deal with their customers directly, from digital wallet to digital wallet, and, thereby, forego the use of debit cards or other digital payments methods from banks or tech companies.
You could argue that the Chinese banking regulator would not want to issue a new currency that negatively impacts its banks as the banking sector is crucial for China’s economy to flourish. However, a transparent and fully traceable digital currency would require banks to step up their game, potentially prompting a change in some of their business models to keep the regulator happy and to remain profitable in a more digitized China.
China is already showing signs that it is tightened its monetary policy in an attempt to hit its economic growth targets. Perhaps a fully traceable digital currency could help both the PBoC and banking regulatory commissioner Guo to get its debt-laden banking sector under control and stamp out bad practices.
While cryptocurrency enthusiasts may be horrified at the idea of a sovereign cryptocurrency that is built on a private blockchain run by a central bank, the reality is that government-issued cryptocurrency versions of their sovereign currency may end up being the future of digital currencies. Why wouldn’t government want to be able to have full control and full transparency of all digital transactions happening in their country?
Of course, the irony is that bitcoin was created so that people can be “be their own bank” and keep their financial transactions private so that the government or banks have no control of their money. Government-issued cryptocurrencies would do the exact opposite.