China’s new bank regulator, Guo Shuqing, is by all reports the reformer the second-biggest economy desperately needs. His 17 months as stock market watchdog served up so many directives so rapidly that traders called him “Whirlwind Guo.”
He arrives on the banking scene at a moment when China’s financial system is in a whirl of its own. The immediate challenge – murky, debt-laden banks threatening China’s economic outlook – is well known. But a longer-term threat, an existential one, is landing along with Guo: a Chinese government version of Bitcoin that makes you wonder if the nation will even need banks in 10 years.
In creating its own cryptocurrency, Beijing is taking the whole if-you-can’t-beat-them-join-them concept to new heights. Earlier this month, the People’s Bank of China sent shockwaves through Bitcoin circles by halting withdrawals and bringing the heads of cryptocurrency exchanges in for a good talking-to. Then last week, the PBoC announced it’s going digital in a big way. As China mints its own block-chain medium, will it ban Bitcoin transactions? Given the tight correlation between zigs in the yuan and zags in Bitcoin values, the PBoC’s entry could be a game changer – and not necessarily for the worse.
As Guo settles in at China Banking Regulatory Commission headquarters, his immediate task is reining in a shadow-banking system run amok. Asset-management products alone have surged toward $9 trillion, a figure that’s beginning to rival China’s gross domestic product. Such products exist largely off balance sheets, but any stumbles would quickly imperil China Inc. Liquidity risks abound as banks experience trouble selling securities. Earnings growth is fizzling as bad loans increase and margins disappear.
Optimism China can grow north of 6% ignores the extent to which Beijing is leveraging its future. Non-performing loans, say analysts at CLSA, are 10 times higher than China’s official 1.7% ratio. Not surprisingly, funding costs are rising, while capital outflows are accelerating. If Guo hopes for a honeymoon period, he’d better get used to disappointment. He’d also better see the PBoC’s digital currency move as a well-timed addition to Beijing’s toolkit as daunting challenges mount.
Free-market purists and privacy watchdogs will abhor the idea of Beijing co-opting the Bitcoin space. There are plenty of reasons to think the opaque Communist Party minting an opaque cyber-currency could end badly. But a PBoC-backed “Bityuan” could achieve two important goals in Beijing.
First, reducing corruption. Analysts at Zero Hedge came up a “digital downside” list: officials will know of every cent you spend; they can track transactions in real time; they will know who you’re dealing with; tax collection will be instantaneous; governments can impose negative interest rates whenever they wish. But Bityuan would make money laundering and rent seeking vastly more difficult, helping both Guo and President Xi Jinping clean up China Inc.
Second, monetary efficiency. Last April, I argued that the Bank of Japan should consider a block-chain medium to better influence business and consumer behavior. Since cash pays no interest, it can be useless to central bankers trying to stimulate demand. As Bank of England chief economist Andy Haldane has argued, monetary policy makers could adjust interest payments, both up and down, via digital currencies. That could help the PBoC gain more traction, policy-wise.
“It’s hard to envision a future, though, where governments don’t co-opt block chain technologies. Believing politicians will steer clear sounds as naïve as those arguing in the early 1990s that they wouldn’t meddle with the Internet.”
It might also incentivize change-averse bankers to raise their games. A PBoC currency, after all, could evolve into an existential threat for bankers. Initially, Bityuan would probably be issued to banks, who’d then offer them to account holders. Things wouldn’t change all that much for customers rallying around payment systems offered by Alibaba’s Alipay, Tencent’s WeChat or Baidu’s digital wallet.
But overtime, won’t sellers seeking lower and lower transaction costs opt to cut out the middleman? And couldn’t the PBoC’s desire to have more direct influence over money supply through an interest-bearing digital currency – or punish derelict bankers – leave commercial banks on the outside looking in?
Again, Bitcoin enthusiasts will be horrified at governments nationalizing cryptocurrencies. And you have to pity the Winklevii a bit. First American twins Cameron and Tyler Winklevoss claimed Facebook was stolen right under their noses. Now it may be Bitcoin — just as they hope to create the medium’s first exchange-traded fund. It’s hard to envision a future, though, where governments don’t co-opt block chain technologies. Believing politicians will steer clear sounds as naïve as those arguing in the early 1990s that they wouldn’t meddle with the Internet. Just as China bent cyberspace to its whims – and jilted Facebook – the PBoC and its peers are sure to make cybercurrencies their own.
Either way, it’s vital that Guo makes Beijing’s reform process his own. Recent signs the PBoC is tightening monetary policy are a good start. But if China is going to avoid Japan-like debt crises and lost decades, it must get banks under control. If Bityuan adds to Guo’s toolkit, then it may have quite the silver lining.