The game between China and the US is escalating, how can China break through? Are there any cards to play in the crypto field?
The US suddenly asked China to close the Consulate General in Houston within 72 hours. What kind of fame did it make?
By Claire Wu, a writer from Twitter
The most exciting news on Wednesday (July 22) was America's sudden demand that China close its consulate general in Houston within 72 hours on the grounds of protecting US intellectual property rights and US private information. Hong Kong's Hang Seng Index plummeted 577 points towards the close of the market, smoothing yesterday's rise driven by the favorable atmosphere for the establishment of the Hang Seng Technology Index. The offshore and onshore renminbi rapidly weakened, both falling below the 7.0 mark, and the offshore renminbi depreciated more than 350 basis points to reflect investors' concerns about the escalation of tension between the US and China.
Recently, US Secretary of State Pompeo has made many amazing remarks. The content covers the South China Sea issue, the Xinjiang issue, China's system and ideological issues, and the Hong Kong issue is an indispensable source of discussion. It makes people feel that the new Cold War era is quietly approaching.
Picture source:Pixabay
Hong Kong's “Wireless” news reports that the COVID-19 epidemic in the US shows no signs of abating. Through the TV screen, I can also feel US President Trump's resentment that China has failed to eliminate COVID-19 in China, which has spread to the world. Jin Canrong, vice dean of the School of International Relations at Renmin University of China and an expert on American issues, pointed out that the US might not even hesitate to launch a war to knock out China's momentum and slow down China's rapid development. He believes, first, that judging from the various sanctions and words and actions currently introduced by the US government, the strategic animosity towards China is deeper than expected by the outside world. Second, probably because of the general election, the team needs to raise the level of confrontation between China and the US, divert domestic attention, and obtain support from the domestic market. However, regardless of the reason, the conclusion is clear that Sino-US relations will continue to decline.
Why is Hong Kong on the cusp of disputes?
Since the beginning of trade negotiations between China and the US, Hong Kong is already on the cusp. The implementation of Hong Kong's National Security Law has brought the relationship between the two countries to a freezing point, and the US has vowed to sanction Hong Kong. So why does the US see Hong Kong as a nail in their eyes?
The US announced some time ago that it will restrict US pension funds from investing in Chinese securities, strengthen the financial review of China Securities, and even demand that China Securities be delisted. Soon, investors saw China Securities go public for the second time on the Hong Kong Stock Exchange. In the past, the target for Chinese technology stocks was to be listed on the NASDAQ, but now they have all dispelled this idea. According to the latest news, Unicorn “Ant Financial” uses newly established science and technology innovation boards in Hong Kong and the mainland as listing destinations. Mainland and international capital are interconnected between the mainland stock market and the Hong Kong stock market through Shanghai Stock Connect and Hong Kong Stock Connect. The rise in the hot speculation sector and the performance of the US NASDAQ technology stocks did not make much difference, making the US sanctions against China Securities invisible. Hong Kong, can you keep a low profile?
Also, with the US printing so much money, smart money will look for risk-free arbitrage opportunities around the world. Hong Kong's linked exchange rate system allows the Hong Kong dollar to fluctuate within a narrow range of 7.8 against the US dollar. Therefore, smart money will first go to a bank account in Hong Kong with higher interest rates than the US to earn risk-free interest spreads, wait for an opportunity, and then enter the stock market or property market to earn higher profits. Over the past few weeks, we have continued to see hot money flowing into Hong Kong. It can be seen that the linked exchange rate has indeed created a good investment environment for Hong Kong.
From the perspective of the US, Hong Kong's linked exchange rate system has instead established a competitor for itself to be used by the “enemy.” I feel very unhappy!
Picture source:United News Network
What are the options for sanctioning Hong Kong?
Among the many options to sanction Hong Kong, cracking down on Hong Kong's linked exchange rate system is considered a “nuclear option.” Because with the support of the linked exchange rate system, the Hong Kong dollar is an instrument for the US dollar, and the equivalent value of the US dollar can be exchanged at the bank at any time according to the official exchange rate. The stability of the US dollar means the stability of the Hong Kong dollar. I believe everyone knows the importance of the stability of a country or region's currency to the local economy and finance. Funds can also circulate freely, so the requirements are even higher.
The Financial Secretary of the Hong Kong Special Administrative Region, Chan Mao-po, told the media that the US does have the right to restrict the use of US dollars anywhere, but Hong Kong is the world's third-largest foreign exchange settlement center for US dollars. If there is a shock in Hong Kong, the US will also be affected, including shaking the international community's confidence in the US dollar. Therefore, I believe the US side will act prudently, and the Hong Kong SAR government also has ways to deal with it. The countermeasure was endorsed by more than 440 billion US dollars in Hong Kong's foreign exchange reserves. It supports a monetary base of 220 billion US dollars, with a ratio of 2:1. Furthermore, China holds up to 3 trillion US dollars, which is also a strong backing for Hong Kong's linked exchange rate. According to a report released by J.P. Morgan Chase, it is expected that the linked exchange rate system linked to the Hong Kong dollar and the US dollar will not change. The reason is, “The ability and will of the authorities to maintain this system is still very strong.”
Chen Maobo also revealed that Hong Kong is the third largest US dollar foreign exchange settlement center in the world. More than 1,300 US companies operate in Hong Kong. The total asset value and customer deposits of the US banking industry in Hong Kong in 2018 were US$148 billion and US$79 billion respectively. Once any excessive act triggers China's countermeasures and causes China to sell off its holdings of US Treasury bonds and stocks, the impact on the global financial system based on the US dollar will be at the level of a tsunami. As far as Trump's election is concerned, it seems that the gains outweigh the losses.
However, some people said that if Singapore were given enough time to develop, Singapore could completely replace Hong Kong's status. I think this one argument is debatable. Hong Kong serves the Greater China region, and Singapore serves Southeast Asia. After going public in Singapore, many Chinese companies are forced to return to Hong Kong due to problems such as insufficient local market turnover. The Chinese government's support policy for Hong Kong should not be underestimated. The example above shows that what supports Hong Kong is China's huge market. High-quality investment targets are one of the prerequisites for attracting capital inflows, and the network effect requires cooperation from all parties to work.
Of course, the US restrictions on Hong Kong's use of the SWIFT settlement system are also part of the sanctions plan. However, the INSTEX settlement system, which was founded by the three countries of England, France, and Germany, has become an alternative to SWIFT in some regions. The purpose is to take a different approach to help European companies bypass dollar settlements and conduct normal trade with regions sanctioned by the US, such as Iran, outside of the global financial system dominated by the US. The governments of Belgium, Denmark, Finland, the Netherlands, Norway, and Sweden have also recently joined INSTEX. In the future, Hong Kong may also be a member of this system.
Can cryptocurrencies help sanctioned regions break through blockades?
In addition to traditional settlement systems, cryptocurrencies have become an important option to break through restrictions in sanctioned regions. For example, in order to break through the financial blockade, Venezuela issued a cryptocurrency called Petro (Petro) in December 2017, backed by the country's oil and mineral reserves, with the aim of supplementing Venezuela's bolivar currency as a means of obtaining international financing. In January of this year, a conflict broke out between the US and Iran. The Iranian government issued more than 1,000 cryptocurrency mining licenses in a high-profile manner and spent 200 million dollars to set up cryptocurrency mining farms with the intention of using cryptocurrencies to evade sanctions from the US and other Western countries. North Korea is even more active in using cryptocurrency to evade sanctions. Rumor has it that North Korea has a team of hackers with technology comparable to Google's geek team, and Bitcoin has become North Korea's central bank reserve.
In the last two years, stablecoins have become one of the currency options for cross-border trade settlement. During Russia's sanctions by the US in 2019, nearly 3 million USDT was traded daily on Moscow's major OTC platforms, while as little as 10 million or 30 million US dollars of USDT flowed into Chinese companies from the Moscow OTC market. From the chart below, Hashpi inferred that most USDT was used for one-time transactions. Judging from the gradual growth of stablecoins this year to the same amount of on-chain value transfer as Bitcoin, the on-chain activity of stablecoins such as USDT in the first half of 2020 is likely due to real-world cross-border remittance demand. [1]
Data source: Coin Metrics
However, today's stablecoins are no longer extrajudicial. The on-chain tracking data provided by Coinbase and Chainalysis to the US government and financial institutions, and the KYC of centralized wallets and exchanges can already provide references for regulators to respond and counter measures. Recently, Centre (note: Centre is a joint venture between Coinbase and Circle) blacklisted an Ethereum address worth 100,000 USDC, effectively freezing the funds in that address. Coincidentally, Tether, the issuer of USDT, another centralized stablecoin, blacklisted an Ethereum address holding 158 USDT on July 10. This is the 40th blacklisted address by Tether. Anonymous cryptocurrencies may be an important future development direction, but this technology still has a long way to go. Currently, it is only a financial toy for IT prodigies and scientists.
In addition to cryptocurrencies, digital fiat money issued by central banks is also one of the important options for dealing with US financial sanctions. China is far ahead of other countries in developing and educating digital fiat currency CBDCs, and is currently being piloted in Suzhou and other regions. Central banks in France, Thailand, and many other countries and regions are also in full swing developing digital fiat currency. Digital fiat currency itself is a type of cryptocurrency, which has the function of instantly crossing borders and transferring value. However, how can central banks issue and use digital fiat currency without affecting the operation of traditional financial institutions and avoid deflation is an important challenge.
The US currently enjoys the privilege of issuing US dollars and exporting US dollars. The US dollar is a hard currency in the world economy and finance, and an important safe-haven tool. This is inseparable from the strong strength the US has accumulated over decades in the fields of economy, finance, technology, and military. From the perspective of the United States, in order to consolidate its absolute monopoly position and suppress rising forces that may pose a threat, it is foreseeable that Japan, the European Union, and today's China are all targets of America's crackdown at any cost. However, the changing times and the continuous development of the cryptocurrency sector have provided many solutions to counter the hegemony of the US dollar. We hope that while the world landscape is being restructured, the rapid development of technology can help humans avoid wars that cost lives.
Note: [1] Today's recommendation | Behind the market capitalization breaking 10 billion dollars: the path of stablecoins to get out of the circle (Author: Hashpie)
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