The Breakdown - China's Latest Digital Currency Trial Is Its Most Important Yet

Episode Date: December 8, 2020

Today on the Brief: COVID-19 vs. Stimulus  Small hedge funds outperform large brethren  Equities now worth 115% of global GDP  Our main discussion: Why the newest trial of China’s central bank digital currency is its most important trial yet.  In this episode, NLW discusses: The significance of the “Double 12” shopping festival  How the participant merchants have changed Comparison of the size of the lottery Changes in public interest Why it matters to the crypto industry 

I think that CBDCs are going to have an important relationship with private cryptocurrencies and Bitcoin specifically. I believe they're likely to drive adoption both by virtue of easier on and off-ramps, in other words, infrastructure, but also because those surveillance properties create more of a raise on debt for things like Bitcoin that are outside the purview and control of any one government. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and level.

And produced and distributed by CoinDest. What's going on, guys? It is Monday, December 7th, and today we are talking about why China's latest digital currency trial is its most important yet. First up, however, let's do the brief. First on the brief today, COVID versus stimulus. So we have been watching the stock rally and wondering if we would see some sort of short-term turnaround. That was the entire theme of Friday's episode. Basically, we've been excited about the idea of vaccines as well as the prospect of stimulus.

The problem with vaccines is that even though we're seeing such positive trials, we're moving to an approval stage, there's still a lot of now before then. There's still a lot of time before they've rolled out to the entire population of people that need them rather than just the first-line health care workers, for example. Markets faltered today on news that U.S. hospitalizations had hit a new all-time high, 101,487, with ICU patients topping 20,000 for the first time. Sunday had 175,000 new cases, which, while lower than last week's peaks above 200,000 new cases per day, is still prompting governments to enact a new wave of shutdowns.

On Sunday, California had its highest ever daily total. of 28,000 COVID-19 cases. It also saw a set of new restrictions go into effect. San Francisco Bay area businesses are closed through the New Year. L.A. and San Diego are under stay-at-home orders through the Christmas holiday as well. On the flip side is stimulus. There is momentum building around a $908 billion relief plan, which Republicans are saying is not a stimulus plan, but a relief bill. So let's talk about who is mad about what. It doesn't include $1,200 individual stimulus checks like many in the progressive wing of the Democratic Party wanted to see. This is, of course, a big point of consternation and expect any additional bills that come

once Biden is inaugurated to include that sort of measure. It also includes $160 billion of relief to states, which Republicans are really upset about, so those are potential sticking issues. Still, both Democrats and Republicans have pointed to the November Jobs Report as motivation to get this thing done. Next up on the brief today, an interesting little nugget from the Wall Street Journal around hedge fund performance during the crisis. Large funds have had a very bad time of it. Large funds with more than $1 billion under management are down on the year 2%, including the 10 largest funds, which are down 1.85%. That's compared to an S&P 500, which is up more than 2%. Smaller funds, however, those with less than $250 million are doing much better than $1.50 million are doing much better

than their peers. This is, the Wall Street Journal supposes, because they're able to move in and out of holdings more nimbly, it's also because of their smaller size. Big wins can have more outsized impact on overall fund performance when there's less assets under management. The ironic thing is that between March and June, big firms were in vogue as compared to the smaller guys, right? We were in a flight to safety and the smaller guys is seen as more risky. This started to change, however, in Q3 of this year, when requests for boutique managers grew 20, percent from the year before. This is in keeping with academic research, a study found that on average between 1995 and 2014, smaller hedge funds performed better during crises for the type of reasons

that we talked about above. Another reason, shockingly, as funds grow bigger, income from management fees grows, which reduces incentives around fund performance. Still, net net, you would have been better off just planting money in the S&P 500 this year than being with any hedge funds, so make of that what you will. Third up on the brief today, the world total stock market capitalization has hit 100 trillion for the first time ever. This is 115% the value of global GDP. I asked my followers on Twitter for their interpretations. A lot of the answers were sort of along the lines of what, where else is it going to go? Eugene Gantz said, in a negative yielding world, investors see equities as a store of value. Bitcoin and even gold are still not options for the huge pensions,

endowments, insurers, etc. Agent Tripathi said debt is trash. Burr needs to go somewhere. Many also discussed asset price inflation. Natural Money BTC said an ever-increasing percentage of global purchasing power is being allocated to equity and bondholders via asset price inflation slash the wealth-effect strategy of central banks. Another interpretation is that this shows fundamental instability. Stacey Herbert wrote, explains why Warren Buffett has dumped so much of his portfolio and is sitting on a mammoth pile of cash. Interestingly, it seems to me that there is broad-scale agreement both that assets are overvalued but that their price is also likely to continue to rise nonetheless.

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coordination with the Double 12 shopping festival, which is a large shopping festival that happens around, you guessed it, December 12th each year. Now, by volume, this is not as big a deal as the Double 11 Festival, which is Alibaba's massive annual campaign. However, it is still important in large part because smaller merchants can participate in Double 12, where Double 11 has strict requirements for merchants. This festival started in 2014 when a group of marketplaces including Lazada and Zalora launched a festival. There are some impressive stats around it. The festival sees a 4 to 5x increase in web traffic to online shopping websites. It's all over South Asia, and 60% of possible unique visitors access shopping websites during the event. So this lottery in Shujo will give away 20 million

yuan worth around $3 million. U.S. dollars. Obviously, this will be given away as the new digital RMB, but we want to look at now how it differs from the previous test and why it's even more significant. The first part of this is who is accepting the digital RMB. The whole point of these trials is not just to give people money, but to give people money that they then spend. In the Shen Zhen trial, the test was restricted to 3,300 physical stores in a specific district that had been set up to accept the payments. In this new trial, lottery winners can spend their winnings on JD.com, which is one of China's absolute biggest online retailers. Like Amazon, jd.com has third-party vendors as well as proprietary warehouses. The lottery winners will only be able to spend

on the proprietary warehouse products. That said, these proprietary warehouses are themselves a point of differentiation from Alibaba's Taubow or T-Mau.mau. JD.com is also linking up its proprietary offline stores, which includes almost 10,000 supermarkets, restaurants, convenience stores, and more across Shujo. Next, let's look at how much is being given away. In the Shenzhen test, it was 10 million digital yuan for 50,000 local residents. In the Shujo test, it's 100,000 residents with 20,000.

million digital yuan. They also have two weeks instead of one week to spend it, so basically everything is doubled. There are also in this test a new set of features being tested specifically around offline communication. This is one of the big questions that central bank digital currencies face. Can they work offline when there's no internet available? This trial is going to introduce in a very limited way an offline trial that is based on nearfield communication. Only less than 1% of the 100,000 lottery winners will be selected to test this feature, but still it's an important milestone on the development of CBDCs. A fourth way that this trial differs is that there are more banking choices available to lottery winners. China's four largest state-owned commercial banks, which are, by the way,

also the four biggest banks in the world by total assets, have been developing mobile and hardware wallets for the DSEP project. In the Shenzhen trial, winners had to choose one of these banks to activate a DSEP wallet, even if they weren't already banking with them. In the Su-Joe trial, there will be two additional banks, which are obviously also state-owned, that will be added, just expanding the number of banks that have access to be a part of this program. Reportedly, as well, a number of other private actors, private-in-quotes, because we're talking about China here, like Union Pay, D-D-D-D and Ali Pay and WeChat Pay are also working on infrastructure for DSEP. Fifth and finally, when it comes to how this trial is different from its predecessor, a small but notable statistic.

A first test seems to have increased awareness. A we-chap blog post from the Shenzhen government a couple months ago about the test has a total today of 83,000 views. The Shujo-Wechap blog announcement, meanwhile, got 100,000 views within a day of going live, which seems to me to indicate that that Shenzhen campaign actually raised awareness of this project as a whole. So why is all of this important? As I've said before, I think that central bank digital currencies are going to be a defining macro issue of the years to come. They bring with them the potential for consumer convenience, as well as for much more nimble, specific, fast-acting monetary policy. They also carry enormous

risks, particularly in terms of surveillance. To me, they feel like an inevitability. What government wouldn't want this ability to be nimble with its monetary policy, to surveil transactions, to fight crime, especially compared to cash, which is so opaque and hard to control, it's like a government's dream come true. There are, of course, reasons that cash, however, is important and that this introduction to the CBDC era will come with some serious fights, if for no other reason than Western values of financial privacy. What's more, I think that CBDCs are going to have an important relationship with private cryptocurrencies and Bitcoin specifically. I believe they're likely to drive adoption both by virtue of easier on and off-ramps, in other words, infrastructure,

but also because those surveillance properties create more of a raise on debt for things like Bitcoin that are outside the purview and control of any one government. Now that's said, the introduction of CBDCs could also be justification for trying to ban private alternatives, as in, why should we let these stable coins stick around when we've already created the ultimate stable coin that we run and control? In this, China is not only the nation that is for, farthest out ahead, even though they are by a mile. It's also the nation where the purest unfettered form of CBDCs will be seen, totally unencumbered by those privacy and surveillance concerns. We owe it to ourselves to watch these CBDC trials because they're going to map out one extreme

of what I believe is an inevitable part of the future financial landscape. Anyways, guys, that's it for today. I hope you enjoyed this show. I'm obviously going to continue keeping track of CBDC advancements in China and beyond. But for now, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.