China: the central bank fears Facebook Libra

Wang Xin, director of the research department of the People’s Bank of China (PBOC), raised some doubts about the impact of Facebook’s Libra on global monetary policy. 

In particular, during an academic conference hosted by the Institute of Digital Finance of the University of Beijing, he said: 

“If [Libra] is widely used for payments, cross-border payments in particular, would it be able to function like money and accordingly have a large influence on monetary policy, financial stability and the international monetary system?”

In other words, the People’s Bank of China fears that the new digital currency of Facebook could have a major impact on monetary policy and financial stability at the global level. 

According to South China Morning Post, this project is effectively forcing the Chinese central bank to step up its efforts to create its own digital currency, particularly for Chinese cross-border payments, in view of Libra’s direct competition. 

In fact, PBOC was the first major central bank to study digital currencies as early as 2014, with the very aim of addressing competition from cryptocurrencies, including bitcoin, so much so that in 2017 it even created a special research institute to further study these technologies.

According to Wang, the PBOC is paying close attention to the development of the Libra project and on the subject of cryptocurrencies he added: 

“We had an early start… but lots of work is needed to consolidate our lead.” 

Furthermore, China still has a ban on cryptocurrency trading, which it considers to be a major financial risk, but despite this, the Chinese continue to participate in the market. 

The idea of developing a YuanCoin has been around for a long time, but recent events suggest that the development could be accelerated. 

Wang Xin is also concerned that Libra may further benefit the US dollar against other fiat currencies, such as the Chinese yuan:

“If the digital currency is closely associated with the US dollar, it could create a scenario under which sovereign currencies would coexist with US dollar-centric digital currencies. But there would be in essence one boss, that is the US dollar and the United States. If so, it would bring a series of economic, financial and even international political consequences”.

Libra will be backed by a basket of currencies which does not include the yuan and in which the American dollar could be the dominant currency. However, for some time now the Chinese fiat currency has become part of the Special Drawing Rights of the International Monetary Fund. 

In other words, the Facebook project has inevitably entered the battlefield of the international currency war that has been going on for several years now and in which China is the main opponent of the US.