- The $16 trillion of offshore dollar deposits at international banks won’t turn into the equivalent amount of Chinese yuan.
- Instead, that $16 trillion will shrink to a small fraction of its present volume, because the Big Tech/fintech revolution will make them redundant.
- Instead, as Morgan Stanley analysts explained this week, “banks will lose their deposit base” as digital currencies replace their most basic functions.
A recent news article published in the Asia Times written by David P. Goldman reveals that China’s digital yuan displaces the dollar.
Bloomberg report
An April 11 Bloomberg report declared, “The Biden administration is stepping up scrutiny of China’s plans for a digital yuan, with some officials concerned the move could kick off a long-term bid to topple the dollar as the world’s dominant reserve currency.”
Either the Biden Administration or Bloomberg (or both) is confused. China has no intention of replacing the US dollar with its RMB within the framework of the existing world banking system, as People’s Bank of China Deputy Governor Li Bo said April 19.
In fact, China has no incentive to this, and could not do so even it wanted to.
Which is the world’s reserve currency?
The yuan won’t replace the dollar as the world’s reserve currency.
Instead, the role of reserve currencies that began with the pound sterling under the Pax Britannica will atrophy over time, and with it tens of trillions of dollars in zero-interest loans that the world now extends to the United States.
Central bank digital currency (CBDC) account
Every business in the whole variegated, complex supply chain will make a digital transfer from its central bank digital currency (CBDC) account.
The People’s Bank of China is collaborating with the world’s main agency for international payments, the Society for Worldwide Interbank Financial Telecommunication, to expedite financial transfers in digital yuan.
Exporters and importers
Exporters and importers keep bank balances in dollars and euro (mostly), because those are the currencies in which banks lend.
The majority of offshore bank deposits are in US dollars – $16 trillion worth – even though the US accounts for just 8% of world exports. China accounts for 12% and its share is growing.
What doe Morgan Stanley team argue
The Morgan Stanley team argues that the digital yuan won’t threaten the reserve status of the dollar, which technically is correct but misses the point: The digital system will hollow out the deposit base of the banking system, most emphatically for international trade financing. Reserve currencies won’t disappear, but they will become vestigial.
Chetan Ahya’s report focuses on the domestic implications of digital currencies, which may be extensive, rather than the global implications, which will be tectonic.
The United States will lose what economists call seigniorage, a term that derives from the difference between the value of gold or silver coins and the their bullion content.
This amounts to about $25 trillion by my rough estimate (the $16 trillion in overseas dollar deposits plus the $8 trillion in US Treasuries owned by foreigners).
The US will lose this enormous volume of cheap credit from the rest of the world just when it needs it the most.
Morgan Stanley’s chief economist Chetan Ahya and his colleagues entitled an April 19 report “Digital Disruption: The Inevitable Rise of CBDC.” They observe:
- “Even though central banks will try not to disrupt the banks, CBDC accounts will increase competition for customer deposits.
- “Direct access to central banks will allow tech-enabled non-banks to offer payment services and digital wallets, capturing customer transaction data in the process.
- “In combination with advances in AI, big tech will be able to use transaction data for credit assessment and cross selling.
- “In the most disruptive case, banks lose deposit base, credit creation needs to be funded wholesale or by central bank.”
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Source: Asia Times
