The Breakdown - Is China Poised to Nationalize Alibaba?

Starting point is 00:00:00 When we're discussing CBDCs in China, we're talking about geopolitical and geostrategic questions. I'm interested in big picture power shifts, and I believe that there is going to be massive battles around the balance of payments, the balance of trade, around the very nature of the global payment system. And this is a front that's being fought right before our eyes, as I said, both between China and other players, but also within China. Welcome back to The Breakdown with me and I. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

Starting point is 00:00:36 The breakdown is sponsored by nexor.io and stacks2.com and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, January 12th, and today we are talking about what China's prospective nationalization of Alibaba has to do with central bank digital currencies. First up, however, let's do the brief. First on the brief today, let's do a little review and accounting for yesterday's Bitcoin crash. This was, of course, the main point of discussion on yesterday's show. Now, in terms of price, we've recovered slightly. There was a battle this morning around 36,000, but at least as I'm recording, the bears have won that one for now. Still, that's not really the only data you should

Starting point is 00:01:19 know about. Bitcoin's active addresses and trading volumes are now at all-time highs, having surpass the previous 2017 Bull Run. It is worth noting that high volume yesterday did in part reflect some newcomers who were panic selling. The number of addresses holding less than 0.01 BTC dropped from 8.54 million to 8.53 million. And overall, the volume was insane yesterday. Larry Sermak from the block tweeted, Coinbase recorded record daily volume yesterday of 9.56 billion. Just to illustrate how crazy that amount is, that's more than the total volume for Q1 2019, and also larger than the total volume for January last year. Here's another number, however, that is also important. While the newbies were panicking, big players took advantage. The number of whale entities increased yesterday

Starting point is 00:02:10 to a new record high of 2,140 addresses. Or more accurately, cluster of addresses, that means these are clusters of addresses that have over 1,000 Bitcoin each. So in total, some number of Bitcoin whales who had 900 or 550 bitcoins came in and scooped a bunch of that new supply to nudge them over into that whale territory. I also think this means that large investors anticipate this pullback to be short-lived. And if you need some other historical analogy to be comfortable with that, the top-to-bottom pullback yesterday was around 28%. There were six dips down larger than that in 2017 on the way to having a growth year over 1,200% to the former all-time Hi, six separate times. Next up on the brief, let's talk about regulatory good news.

Starting point is 00:02:59 Another counter to yesterday's conversation, which was all about regulatory FUD, although obviously on a much smaller scale, two Kentucky lawmakers have introduced a bill to incentivize crypto miners to set up shop in Kentucky. The bill would exempt commercial miners from paying 6% sales tax or 6% excise tax on their rigs electric bills and other mining equipment. They're arguing that Kentucky has the opportunity to become a national leader in crypto mining because of low energy rates. And for me, this is an example of a narrative shift we're living through, where mining is moving from something that's just energy wasting, to something that is economically generative, and perhaps at larger scale, geostrategically important.

Starting point is 00:03:39 Third and finally on the brief today, let's do a quick one for the NERP slash ZERP kids. Of course, I mean zero interest rate policy or negative interest rate policies. UBS has lowered the threshold for charging savers to accommodate negative interest rates. Starting in July, clients that have deposits worth about $280,000 U.S. will have to pay to keep their money saved. This is obviously the opposite of having your money return for you in a savings account. Previously, that threshold was $607,000 saved, so a lot more people will qualify under this new system.

Starting point is 00:04:11 The Bloomberg piece I read about this also notes that these lenders are pushing depositors to put their money into investment products instead. So we're seeing, one, the elimination of savings, and two, the push farther out onto the risk curve all in real time. And you wonder why stablecoin and crypto yield accounts are so appealing right now. But with that, let's shift to our main topic. Is China poised to nationalize Alibaba? And what does it have to do with central bank digital currencies? The genesis of this topic is that there are rumors swirling that China intends to nationalize Alibaba and Ant Financial. These rumors are being reported by the International Business Times, and so far they haven't been picked up by other outlets, which means there's not enough

Starting point is 00:04:54 evidence for many other outlets to print it as news. Still, I think it's a huge deal, it's contextual, and even if the rumors end up overstated, it's been long overdue for me to do a little review about what's been going on in China's economy and how larger sets of issues interact with their central bank digital currency. The first thread of this story is actually the piece that we discuss most when it comes to China on this show, their in-development central bank digital currency. To review, China had been researching a digital yuan as far back as 2014. However, the announcement of Libra totally pushed the project into overdrive. When Facebook announced Libra, everyone pretty much had gnarly reactions on the governmental level,

Starting point is 00:05:35 but China's was particularly intense in terms of its sense of threat. Why? Despite having one of the world's largest economies, China's R&B is not widely used as a global settlement currency or reserve asset. In 2019, for example, here was the currency composition of foreign exchange reserves. U.S.D. 60.89%, euro, 20.54%, Japanese yen, 5.7%. British pound sterling, 4.62%, Chinese Remembleb, 1.96%. Canadian dollar 1.88%, Australian dollar, 1.69%. China does not want to be floating around in position 5 near the Canadians and the Australians when it comes to how people are using their asset as an exchange reserve. Now, there's a similar story as a settlement currency. In 2020, R&B's share of the foreign exchange market rose to 4.2% up from 0.3% in 2016, ranking 5th globally.

Starting point is 00:06:32 However, it was only used for 1.76% of payments despite China contributing 10% to trade in goods. In other words, the world that China lives in is one where the economy is more successful than its currency. This leaves it vulnerable to the dominant systems for international payments which are largely run by the U.S. In particular, the SWIFT system is an increasingly weaponized tool of U.S. foreign policy. It's used to sanction specific addresses, for example, that people can and can't do business with. Given this, it's not surprising that Beijing wants to get around the SWIFT system and do so in a way that gives them that privileged place at the center of the new system. The point here is that the internationalization of Chinese currency is a major policy initiative,

Starting point is 00:07:17 and I think the DeSep, the digital currency exchange protocol, is one key part of that. And the DeSep is moving quickly. There have been multiple trials, live trials throughout 2020. They just started another red envelope giveaway in Shenzhen, giving residents the chance to win 20 million digital yuan, about $3 million worth. So 100,000 envelopes will be distributed with 200 digital yuan each to spend between January 7th and January 17th at approximately 10,000 physical merchants. They did the same thing in 2020 but handing out about half as much. We also learned yesterday that the Agricultural Bank of China, which is one of the big four Chinese state-owned banks,

Starting point is 00:07:55 is allowing customers to deposit and withdraw digital yuan from current or savings accounts at ATMs. This is a new trial. Now, when it comes to the battle for central bank digital currencies, all of these efforts are, of course, light years ahead of where the U.S. is in terms of what's coming specifically from the central banks. However, if instead you see a path whereby private, U.S.D. denominated stable coins actually become a formal part of the money supply, this looks very different. This is why last week's guidance from the OCC, the Office of the Comptroller of the Currency, that federally regulated financial institutions could view public blockchains,

Starting point is 00:08:32 like Swift, and use stablecoins as a settlement method, has such huge potential implications, not just in terms of a few banks, but in terms of the global balance of power. A few savvy commenters I saw on Twitter connected the dots and basically pointed out that this could be the new infrastructure for a private-powered digital dollar system in a way that would already dwarf the digital yuan efforts. Taking just USDC, for example, there are more than $4 billion in circulation that have transferred more than 273 billion on chain. To me, at this point, the acting director of the OCC, Brian Brooks, feels like he's just trying to unleash the genie of public blockchains and stable coins out of the

Starting point is 00:09:13 bottle before whoever his replacement is can slam them back in again. And I mean that in the form of banks and bank customers creating new demand. In other words, if these things start to pick up enough, even if Brian Brooks is replaced in the Biden administration, it'll be harder and harder for them to move backwards entirely from the things that he's now enabled. The point is, if you're China, this looks like one possible way that an entirely new money system could pop up with you not at the center, or really a better way to put it, is it could renew for a generation at least the global USD-powered system. That said, this isn't the only threat in China's mind to a central bank digital currency. Many investors want to be a part of the next bull run. Others seek to both

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Starting point is 00:10:45 Attendees can expect to hear talks from Albert Wenger, Laura Shin, Mani-Bali, Hyderafiq, OKCoin, Peter Smith, blockchain.com, and others, as well as surprise announcements, app launches, panels on important crypto topics, a musical guest, limited edition swag, collectible NFTs, and more. for the Stacks 2.0 main net event here. Stacks2.com. That's Stax followed by the number two.com. One of the reasons that people often think Asia is more comfortable with crypto is that they're just more comfortable already with mobile money infrastructure. Let's take, for example, AliPay. This is one of the oldest and most important services of Alibaba having been started in 2004, and this thing is absolutely massive. 1.2 billion unique users, 900 million in China, 300 million outside,

Starting point is 00:11:31 320 million plus daily active users. They represent more than 50% of China's mobile payment market nearly 70% by volume. And financial, the company that runs AliPay and the fintech arm of Alibaba was slated to go public on November 3rd. Their $37 billion IPO was going to be, it seemed, the biggest IPO in history. However, it was not to be. On October 24th, Jack Ma, the founder of Alibaba, gave a speech at the Bunn Summit. Here's how Time Magazine wrote it up. According to an English transcript published by Hong Kong's Apple Daily newspaper, Ma, who is personally worth $48.2 billion, hedged his speech carefully. He described himself as a somewhat retired man, sharing the non-professional views of a non-professional, and conceded that

Starting point is 00:12:16 his ideas might be immature, inaccurate, or even laughable. Politely, he threw in a couple of quotes from China's strongman president Xi Jinping, but as he began inviting the audience described by Reuters as the great and good of China's financial regulatory and political establishment to consider the need for reform of the country's financial system, he crossed a line. He obliquely chided Chinese regulators for stifling innovation and said that Chinese banks suffered from a pawn shop mentality, given that banks, like the informal lenders of yours, still relied on a system of pledges and collaterals. This wasn't all bad, magranted. In the old days, he pointed out, a pawn shop was an advanced idea. Had it not been for innovation such as pledges and collateral, there would be no

Starting point is 00:12:54 financial institutions today, and the Chinese economy would not have developed over the past 40 years to such a point now. He went on though and said, today's financial system is the legacy of the industrial age. We must set up a new one for the next generation in young people. We must reform the current system. This did not go well. On November 2nd, Jack Ma was summoned by Chinese authorities for questioning. On November 3rd, the ant financial IPO was nixed by China's securities agency

Starting point is 00:13:20 that had previously given it the green light. In late December, regulators had instructed the ant group to restructure and adhere to new anti-monopoly rules, among other things, reducing the valuation by billions. And then there were the Rubbins. Right around New Year's, Jack Ma was replaced by another Alibaba exec on the final episode of a business talent competition on TV that he had been leading, Africa's business heroes. He hasn't been seen in public now for two months. For many years, Ma was basically untouchable, an example of China's modern capitalist version of communism. but the Shi administration is hardening to private enterprise. Again from time, just a month before

Starting point is 00:13:59 his Shanghai speech, the CCP publicized new guidelines on how private enterprises are to help the Chinese state now that, quote, risks and challenges have increased significantly from the expanded private economy. Of course, this runs counter to the repeated and pained efforts by Chinese own tech firms such as Huawei, Tencent, TikTok, and Alibaba to portray themselves as independent of government control in the face of mounting U.S. pressure. Persistent reports suggest that Ant Financial might be forced to pass a large chunk of shares to the state could likewise torpedo its global expansion goals. Meanwhile, back over here in the U.S., Trump signed an executive order last week banning AliPay and seven other apps over information sharing with China, which was also the root of the tension

Starting point is 00:14:37 around TikTok. Apparently, they're also considering banning investment in these entities as well. Let's now go back to the CBDC dimension of this. David Pan wrote on CoinDesk last year, quote, the Chinese government appears to view the payments giant as a destabilizing force to China's economy, and the digital yuan is a way to keep companies like this in check. The bank can make it more costly for digital payment platforms to use the digital yuan to lend money, and this might be something the government might want to force. Effectively, these fintech companies are able to offer a variety of new products that look very different than bank products and are in fact increasingly more popular than bank products. However, banks are controlled entirely by the state,

Starting point is 00:15:20 and so this is something that's frustrating to the Chinese leadership. There's also an issue with debt in the country. Again from Pan on CoinDesk, ants booming lending business has struck a nerve with China's top financial regulators at a time when the country is already battling increased default risks and weak banks. To curb fintech's giants' growing influence over the country's economy, Beijing's authorities proposed a new set of anti-monopalistic practices on fintech companies, December. And then here's a quote from my former roommate, friend, former collaborator, and former breakdown guest, Graham Webster, who's the editor of the DigiChina Project at the Stanford Cyber Policy Center, who said, there is a lot of power in the Chinese government's economic

Starting point is 00:15:59 and financial management infrastructure, and if Ant was to erode that power, important people would see it as a step too far. But the Chinese government also prizes these leading companies as drivers of technological independence. The party would have to perceive significant threats to tear them down. So are those threats there? Well, it seems like they might be. Commercial banks in China have been losing cash deposits to these fintech companies. Just for a sense of the scale, the Chinese mobile banking markets saw $8 trillion worth of transactions in the last quarter of 2019, with Alipay taking 55% of that. So at this point, you may notice that there are some interesting parallels between discussions happening over there and discussions happening over here in the

Starting point is 00:16:44 context of big power. Although in this case, it's not speech rights, but the very financial system itself. China, specifically Xi's CCP, wants more, not less control over the economy, and more, not less ability to export that influence, and it is lashing out at both external and internal threats, which gets us back to the rumors. According to the International Business Times, China is now planning to nationalize not only AliPay, but the entire Alibaba and Ant group. An internet finance industry insider told Radio Free Asia, that, quote, this is probably coming from the highest levels. Now, even if it doesn't go to full nationalization, it's clear that they want to make an example of

Starting point is 00:17:23 Alibaba, which gets us back to Graham's point that the Chinese government also prizes these leading companies as drivers of technological independence. The party would have to perceive significant threats to tear them down. Ali Pay and its growing influence reduce the raise on debt for a Chinese digital currency and put major bank decisions in the hand of an independent non-bank non-state entity. That has been allowed to operate so far, but it seems like that is no longer the case. I guess to wrap up, the point that I want to make about this is that when we're discussing CBDCs in China, we're talking about geopolitical and geostrategic questions.

Starting point is 00:18:02 I don't tackle this topic because CBDCs are one of the things that crypto people talk about. I'm interested in big picture power shifts, and I believe that there is going to be massive battles around the balance of payments, the balance of trade, around the very nature of the global payment system. And this is a front that's being fought right before our eyes, as I said, both between China and other players, but also within China. I hope this was a useful little background on that. I have a great guest coming on later in the week, who's an investor who thinks a lot about China, so I hope you'll enjoy that show. For now, guys, I appreciate you listening. I appreciate you allowing me some diversity in the

Starting point is 00:18:39 topics I cover, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Is China Poised to Nationalize Alibaba?

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