An Inflection Point for Digital Currencies Stars the E-Yuan
Last week’s Behind the Markets podcast featured a discussion with Grant Wilson, head of Asia Pacific for Exante Data, on macro research, digital assets and how China’s entry into the digital currency ecosystem could play out over the coming years. Last year, Exante’s data scientists were focused on virus developments in late January, all while the markets continued to rise through February—putting Exante’s research team on the map.
Wilson, who lives in Australia, is focused on China. China is the largest consumer of Australian goods, and the U.S. is a strategic defense partner. Australia has a challenging relationship with China, as it was the first country to ban Huawei’s 5G technology before that movement went global.
Wilson sees the relationship between the U.S. and China as permanently changed. While he thinks there will be some normalization in the trading relationships under President Biden’s administration, any issue involving the transfer of technology will ultimately fall into a security domain that will remain tense.
But the focus of our conversation was more on developments in the digital world. Wilson’s latest thought piece on China states that 2020 was an inflection point, when digital currencies became a mainstay in the global financial ecosystem.
The new digital currency world has implications for how monetary policy is conducted and the role of traditional banks in making loans. This new digital world could change from a fractional reserve banking system to one in which central banks can provide stimulus directly to households.
China experimented with such a currency “helicopter” air drop just last year—with a small token of $30 that could be spent on a peer-to-peer basis. This came with all the know-your-customer validation required to make this work—and all the tracking that governments could desire.
What Is Bitcoin’s Importance?
Wilson believes that Bitcoin showed the world one can conduct peer-to-peer transactions at a large scale without the need for a commercial bank or other intermediary, such as PayPal.
Are Banks Then out of Business?
If you can put money on deposit with the central bank with no credit risk, why would you keep any money with a commercial bank? That is one of the key elements most central banks want to be careful not to disrupt with their digital currencies.
China as a Hard-Money Economy Last Year
While the U.S. had explosive growth in money supply during the pandemic, in many ways China stands out for its limited growth in money supply. Wilson sees huge interest in Chinese bonds for their higher real interest rates and a lot of flows to come from their inclusion in global bond indexes. There also is still a huge under-weight to Chinese yuan (CNY) reserves, with 60% of global reserves in U.S. dollars and only 2% in CNY. Wilson expects yuan reserves to increase, despite the global political tension.
Wilson first wrote about Bitcoin in 2013 and has been a long-term holder. His current view is a little weary and cautious, and he thinks some big moves can happen around year-end, perhaps around tax planning. This happened following the 2017 peak of Bitcoin.
One of the risks to Bitcoin could be government actions that make trading much more difficult. Currently, 77% of Bitcoin mining is taking place in China and perhaps as much as one-quarter of it in Xinjiang province, where the Uighur reeducation camps are located.
This was a really great conversation on the future of digitization and cryptocurrencies, and it was very topical in its assessment of China today. You can listen to our full conversation below.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.