Showing posts with label china. Show all posts
Showing posts with label china. Show all posts

Sunday, April 11, 2021

China Creates a Digital Currency. Joseph LaRosa, Impact Investing Intern, The Ohio State University.

Cryptocurrencies surged in popularity recently due to their decentralized nature, transaction speed, and security. Governments around the world have taken note of this trend and are beginning to rollout nationally backed digital currencies. The first major nation to embark on this journey is China, which announced the Digital Yuan (DY). This federally controlled currency has the potential to disrupt modern financial structures and poses the largest threat to the US Dollar since the establishment of the Euro. 

DY allows the Chinese government greater control over the production and circulation of currency. It also adds a means by which the Chinese government can efficiently and effectively transfer funds between citizens, banks, and government entities, all while cutting out the "middleman" in transactions.  

Growing tired of a US dollar-driven world, China made a bold leap into the future, hoping to increase their global economic power. US officials have been quick to express their concern, acknowledging that the DY will likely affect the US’s ability to implement economic sanctions on China, lessen the US's ability to track Chinese government funding expenditures, and even poses a threat to national security. 

Clearly, from the perspective of the US dollar, broad adoption of the DY would have negative implications. In 2019, a team of veteran policymakers at Harvard University conducted an exercise to create a response to a scenario where North Korea developed a nuclear missile secretly funded with DY. These threats will continue to grow as the Chinese government replaces physical tender with digital currency. (We outlined these factors in 2019. See: Blockchain, Cryptocurrency and the Future of Monetary Policy

In our 2019 report, Creative Investment Research provided a basic breakdown of the current global reserve currency market structure and compared this to a forecast of the projected structure in 2031. It is important to note the growth of digital currencies such as Bitcoin and DY. 

In our paper, we noted Bitcoin’s success in transforming the global economy by facilitating the (almost) costless transfer of funds between individuals and entities. Given Bitcoin’s deregulated nature and the currency's lack of ties to government entities, we project tremendous growth in its use as a global reserve currency within the next ten years. We project similar, but not as extreme, growth for DY over the next ten years. 

Although many want to draw comparisons between these currencies, in reality, they are very different. DY is controlled by the Chinese government and therefore is less volatile. Growth in the currency will be constrained by Chinese monetary policy which will try to control for macroeconomic factors such as inflation. Despite its restricted growth from a foreign exchange perspective, China wants to continue the so-far successful rollout of DY, with the hope of protecting the sovereignty of its currency. 

The question is, will the US do the same.


Is FedCoin, a US Government-issued cryptocurrency, feasible?

Blockchain, Cryptocurrency and the Future of Monetary Policy 

Comments to the Reserve Bank of India on Blockchain, Crypto

Editor: William Michael Cunningham

Tuesday, February 26, 2019

A Conversation with Chang-Tai Hsieh on Crony Capitalism with Chinese Characteristics. Lanxi He (Georgetown), Scott Knewitz (American), Impact Investing Analysts

On February 25th, The Becker Friedman Institute for Economics (BFI), the Chicago Economics Society (CES), and the Booth Alumni Club of Washington, DC, held a cocktails and a conversation event titled "Crony Capitalism with Chinese Characteristics."

The speaker was Chang-Tai Hsieh, Phyllis and Irwin Winkelried Professor of Economics, Chicago Booth School of Business. David Rank, former Deputy Chief of Mission and Charge' d'Affaires at the U.S. Embassy in China, moderated.

Professor Hsieh discussed China’s fast-paced growth over the past three decades, stating that China's economic growth has been unprecedented, defiying economic theory. One reason for this growth is the focus of the political apparatus - communist party leaders search for investments that earn high profits. 

According to the professor, China has developed crony capitalism at the local level that has promoted business development. This approach relies on the fundamental dependence of small firms on the discretion of local party officials. These firms need the approval of local party officials to start a business. This is a deterrent to other potential entrepreneurs who do not have political connections. This may be an issue for sustained growth.

In the professor's view, Communist party leaders are "in bed" with local companies. These firms do not want competition, so party leaders have a direct interest in keeping competition from threatening favored firms, since officials benefit financially from "special dealings" or special arrangements with select local companies. While these types of "special dealings" are common in Western society, they are not as prevalent as they are in China.

By the conclusion of the talk, Professor Hsieh gave us a better understanding of China’s fast-paced economic growth. One conclusion may have been that competitive markets created by local political leaders can drive economic growth.

Saturday, March 24, 2018

Trump's Tariffs on China will Mainly Hurt the Fed by Hongcheng Chen, Creative Investment Research

The Federal Reserve’s Federal Open Market Committee (FOMC) meeting statement on March 21, indicated that the Committee voted for a quarter-point increase in federal fund rate. (See:

The Fed seemed to signal, by this rate hike, that a more robust economic outlook, strengthened, at least in part, due to fiscal policy (tax bill), provides a solid base on which to tighten (increase interest rates) monetary policy more aggressively in the future. The FOMC also sought to cling to a strategy in 2018, according to the statement, that “supports strong labor market conditions and a sustained return to 2% inflation.”

Top FOMC considerations: Inflation targets and the labor market

This cautious stance diverged from market expectation in a surprising way: the market seemed to expect more. The accommodative monetary policy and moderate rate hikes reflected in the FOMC statement caused investors to retreat from their expectations concerning fed rate hike increases. The US dollar Index(DXY) weakened by 0.51%, and both the crude oil future index (CLK18.NYM) and gold future index (GC) increased by 2.28% and 0.43% respectively on the day the FOMC statement was released.

The market may have anticipated an even more aggressive Fed rate hike path, given Fed Chairman Powells optimistic view on the economy noted at the semi-annual monetary policy hearing of Tuesday, February 27, 2018. However, any policy uncertainty should be removed now because target inflation rate and employment level are clearly now the top considerations when the Fed acts to implement rate hikes.

For the balance of 2018, I think the Fed will stick to its gradual pace of rate hikes with a 2% inflation target in mind while attempting to maximize employment. The emergence of the employment variable now becomes a hidden priority behind the obscure economic terminologies in the FOMC statement.

Trumps tariff plan will drag the Fed down

Unforeseeable instability always affects the way in which the Fed reaches its goal and the Trump administration never fails to add instability.

On March 22, President Trump signed a presidential memorandum that imposes tariffs on $60 billion in Chinese imports. Trump has been bothered by the $375 billion goods China/US trade deficit. China and made every effort to change the allegedlyunfair terms of trade”.

As tough and patriotic as Trump thinks he is, hitting China with tariffs can be a tremendous impediment to the Fed, limiting their ability to reach their goal of maintaining an inflation target and maximizing the employment level.

  Increased prices will push inflation higher and cause job losses.

The tariff imposed on goods like aluminum and steel will be passed on to manufacturers and then to consumers. The sharply increased price of steel and aluminum and the products derived from these materials may contribute to rising inflation, causing the Fed to overshoot it’s 2% long-term inflation goal.

As a result, the Fed may have to increase the federal fund rate in order to adjust to the resulting spike in inflation, should we see one. Undoubtedly, such forced tight monetary policy will further damage the labor market and reduce the prospects for continued economic growth.

While a tariff on imported steel and aluminum can help domestic manufacturers win back  market share and thus will create more jobs in that specific set of industries, the increased cost of production may cancel out this effect and may eventually lead to job losses.

What’s particularly galling about this is that history has already taught us this particular lesson. On March 5, 2002, President Bush imposed tariffs of 8%-30% on imported steel to protect domestic steel manufacturers. A trade group, the US Consuming Industries Trade Action Coalition asserted that the temporary tariffs would give rise to more job losses in the steel-using industries than they would save[1]. This assertion was confirmed by research conducted by Francois and Baughman[2], who showed that 200,000 Americans lost their jobs due to higher steel prices in 2002.

Unexpectedly high inflation and job losses are definitely not the goals that the Fed is pursuing.

  Chinas retaliation will adversely affect US employment and economic growth.

China showed no fear relative to Trumps intended tariff hit:China has no intention of having  a trade war with any country,” Chinese ambassador Tiankai Cui responded in a CGTV interview. “But if anybody is trying to be provocative, we will fight until the end.”

On March 23, China’s Ministry of Commerce announced a plan to counterattack Trumps stiff trade tariffs with a list of targeted US products. The listing includes fruit, wine, pork, ginseng, and stainless steel pipe.

The US would not benefit from a trade war. According to the US Department of Agriculture, China is one of US largest export markets in the world and US exports of agricultural and related products totaled $26 billion. US soybean exports to China alone increased 13 times between 2001 to 2016[3].

Since Chinas retaliation list is comprised mostly of agricultural products, US based agriculture-related industries will suffer huge monetary losses, leading to job losses. Consequently, any jobs saved in the steel and aluminum industries will be counterbalanced by job losses in agriculture-related industries.

Demand elasticity is the percentage change in product (or service) demand relative to the percentage change in product price. The higher demand elasticity is, the more sensitive demand is relative to product price. For example, if demand elasticity for product A is -0.1 and that of product B is -0.05, then a 1% increase in price of A will cause 0.1% decline in demand for A, while a 1% increase in price of B will cause only a 0.05% decline in the demand for B. In this case, B is less sensitive to price changes.

Whats more, the demand elasticity range for steel in US is -0.3 to -0.2[4], lower than that for products such as fruit in China (a US agricultural export), where the demand elasticity range is -1.042 to -0.693[5]A 1% increase in price of steel due to the tariff will lead to decrease of only 0.2% to 0.3% in steel demand, while the same 1% surge in price of fruit caused by tariff will lead to decline in the demand for fruit of 0.693% to 1.042%. Obviously, US exports of fruits to China will be affected more seriously than Chinese imports of steel. 

Exports of US agricultural products will decrease more than the imports of Chinese steel will be curbed. US GDP will be more negatively affected due to the decline in net exports.

To get a better feel for this, lets take a look at the Gross Domestic Product (GDP) formula and do the math.

Recall that GDP = C + I + G + (X - M)

Again, job losses and sluggish economic growth are exactly the opposite of what the Fed is working to achieve.

War is war. No one wins when their economies are so tightly tied with each other. While the chance of a full scale trade war remains small, the Feds job will be anything but easy should one occur.

Inflation, job losses and stagnant economic growth.

Is the Fed ready?

1. Read, R. (2005). The political economy of trade protection: the determinants and welfare impact of the 2002 US emergency steel safeguard measures. The World Economy, 28(8), 1119-1137.

2. Francois, J., & Baughman, L. M. (2003). The unintended consequences of US steel import tariffs: A quantification of the impact during 2002. Study prepared for the CITAC Foundation, Trade Partnership Worldwide, Washington, DC.

3. Despite Continued Challenges, China Offers Huge Potential for U.S. Farm Exports. (n.d.). Retrieved March 24, 2018, from

4. Barnett, D. F. (2011). Up from the ashes: The rise of the steel minimill in the United States. Brookings Institution Press.

5. Han, T., & Wahl, T. I. (1998). China's rural household demand for fruit and vegetables. Journal of Agricultural and Applied Economics, 30(1), 141-150.