Yuan Ambitions

War on the Dollar

In 2021 the Xi Jinping administration will get serious about leveraging the digital yuan—or “e-yuan”—in an attempt to weaken the dominance of the US dollar. President Xi’s strategy is meticulous: China is already moving toward its goal of complete control of Hong Kong, one of the world’s main dollar-denominated financial centers, while at the same time invoking the power of the state to gain control of the huge agglomeration of online capital that is the Alibaba group. Under the government’s strategy, by the end of this year, the digital payment infrastructure that Alibaba has established will be able to circulate e-yuan issued by the Communist Party–controlled People’s Bank of China. The next step will likely be the extension of this digital currency to the countries, regions, and trading partners that line China’s expansionist Belt and Road trade routes, and the encroachment on the dollar standard.

While the heavy-handed tactics used by the Xi administration in 2020 and 2021 might appear to be the indiscriminate exercise of autocratic instincts, the aim of these tactics is in fact to spin the dollar and the yuan into a “single thread.” The Chinese government’s imposition on Hong Kong of the National Security Law in June 2020 had the effect of placing the international financial center under the surveillance and control of the Chinese Communist Party. But just when we thought that the fading of a free Hong Kong would mean the end of the Chinese government’s strategy, since proclaiming the PRC in 1949, of “long-term planning and full utilization” of that territory, which has served as a source of US currency for the Party, China forced Alibaba and a host of other Chinese Internet giants to list on the Hong Kong Stock Exchange. This pushed up share prices, thereby attracting rapacious institutional investors, investment funds, and other Western financial capital, which the Chinese government is now holding hostage to prevent the West from imposing sanctions on China.

While US President Donald Trump showed his opposition to China’s policies by signing the Hong Kong Autonomy Act, which imposes financial sanctions on China, this in fact only affected 11 Hong Kong and Chinese officials who had breached the provisions of the Act. The Trump administration also enacted the Hong Kong Human Rights and Democracy Act in November 2019, which allows the US government to prohibit the exchange of Hong Kong dollars for greenbacks. Had that provision been invoked, it would have been a major blow for mainland China, which uses Hong Kong dollars, freely exchangeable with the yuan, as an intermediary for obtaining US currency. Those measures were not pursued, however, due to fears of throwing global financial markets into chaos.

Seizing Digital Infrastructure

President Xi’s government next put the squeeze on the Ant Group, a digital payment and finance giant, part of Jack Ma’s Alibaba Group, and the largest e-commerce platform in China. After forcing the postponement of the initial public offering of the Group’s stock in China and Hong Kong in early November 2020, the People’s Bank of China (China’s central bank) and other governmental authorities ordered Ant to establish a new financial holding company, the intent being to create a major shareholder in China’s state-owned commercial banks and state owned enterprises that would thereby be under the thumb of the Communist Party. However, while IPOs enable the procurement of enormous amounts of US currency, the prospect of foreign investors owning even more of these institutions appears to have worried the Chinese government, something that would interfere with the Xi government’s scheme for gaining control of Ant. The Xi administration also investigated Alibaba on suspicion of breach of competition laws, and will likely order asset sales and a review of business operations.

The digital payment networks currently used in China were established by Alipay, the settlements platform of Alibaba member Ant, and WeChat Pay, the platform of major Internet service provider Tencent. In order to seize control of this infrastructure, the Party devised the e-yuan, which the People’s Bank of China is preparing to issue. The currency is already being trialled in Shenzhen and Suzhou, and the authorities plan to have it ready in time for the February 2022 Beijing Winter Olympics, thereby enabling China’s central bank to circulate the world’s first ever sovereign digital currency.

The e-yuan will complement paper money. Meanwhile, China’s legacy banking system—in which the People’s Bank supplies cash to commercial banks, which then allow citizens to use the currency via deposit accounts—will be maintained. All other currencies currently used by consumers and businesses to make purchases on their smartphones, PCs, and other devices via Alipay and WeChat Pay will be replaced by the e-yuan. This means that the new currency will cause all transaction data pertaining to the 1.4 billion subscriber electronic payment market, which was until now the exclusive domain of the likes of Alibaba and Tencent, to be consolidated into the Party-controlled People’s Bank.

A Police State?

With financial transactions come all manner of information on the individuals, businesses and organizations that engage in them. China’s transition to a digital currency, effected by the totalitarian organization that is the Chinese Communist Party, will enable the Xi administration to take its mass surveillance network, which has thus far relied on informants and cameras, and extend it to every inch of the country, thus cementing the invisible terror of the surveillance state.

If I may return to the topic of Hong Kong, one important motivation for the Xi administration in tightening its grip on the territory is Hong Kong’s status as the recipient of an endless stream of capital from the Chinese mainland: capital flight that has threatened the foreign currency reserves that underpin the Chinese government’s ability to issue the yuan. The chief aim of the National Security Law is the establishment of a political structure that will rigorously monitor Hong Kong’s financial markets. And if the e-yuan is circulated in Hong Kong as well, the authorities will be able to tell who is transferring money when, and for what purposes.

The ambition of the Xi administration knows no bounds. By promoting the use of the e-yuan throughout the Belt and Road, a trading zone that stretches from Eurasia to Africa and also takes in China’s trading partners in Japan, the United States, Europe, and Central and South America, Xi’s government will be able to significantly undermine financial networks that use the dollar standard.

The United States owes its hegemonic status to the fact that the global circulation of the US dollar enables Washington to readily obtain confidential information from around the world and use it to impose targeted sanctions against individuals, companies, and governments that oppose it. The Chinese yuan is of course extremely difficult to exchange for other currencies, or to use in equity or financial transactions, so the transition to the e-yuan will not cause the yuan to catch on as a global currency overnight. Rather, the Chinese government likely envisages a strategy whereby the e-yuan slowly but surely permeates trade transactions, thereby gradually eating away at, and ultimately toppling, the dollar standard.

Sparing the Rod

But how will America respond? The Trump administration, for one, was a silent onlooker to the e-yuan, but did not let down its guard. A Wall Street Journal article from January 7, 2021, notes that US officials are considering banning American investments in the Alibaba and Tencent holding companies.

In November 2020, the Trump administration published a list of 31 companies in which US citizens were prohibited from investing on the grounds of links to the People’s Liberation Army or Chinese security forces. The US government is now proposing that Alibaba and Tencent—China’s two most valuable publicly listed companies, with a combined market capitalization of more than $1.3 trillion and a long list of US investors holding their shares—be added to this list.

Because Trump’s term ended on January 20, his administration ran out of time to enforce the ban on investment in Alibaba and Tencent, but the new administration of President Joe Biden will continue to review the issue as a matter of concern.

The Trump administration performed its review of Chinese listed companies from two national security perspectives. One is the role of US currency and technology in bolstering China’s military. The other is information on US civilian and government organizations collated by China’s Internet companies, of which Alibaba is a good example. The Trump administration would not have overlooked the fact that the Xi administration itself, as well as using the US stock market to procure dollars, attempts to use personal information associated with Alibaba’s electronic transactions to expand Alibaba’s business within China, of course, but also in the United States and elsewhere, thereby enabling the Chinese government to spy on the rest of the world in real time. The fate of the Alibaba investment ban rests on the Biden administration’s ability to share the previous administration’s strategy on Chinese finance.

A Staged Disappearance?

The person at the center of all this, Jack Ma, vanished from all online forums after October 2020, before suddenly reappearing at an online meeting on January 20, 2021. In China, theories abounded as to his whereabouts, with many suggesting that Ma was being held by the authorities or was just too prudent to appear in public. Both theories are attributable to the widely held belief that relations between the Xi administration and Ma are strained.

At a summit held on October 24 and attended by banking and financial surveillance officials and high-ranking government officials, Ma labelled Chinese banks “old people’s clubs,” which he said operate with a “pawnshop” mentality. These comments prompted the authorities to suspend indefinitely Alibaba’s planned IPOs on the Shanghai and Hong Kong stock markets. The Chinese government launched an investigation of Alibaba on suspicion of competition law violations; it also had Ant establish a financial holding company, in which the government then invested public funds, in an attempt to gain influence. With Ma vanishing from public life under such circumstances, most rumors painted him as being opposed to the autocratic Communist Party’s control of the market.

This doesn’t make sense, however. Ma’s rags-to-riches career took him from being a lowly English teacher to a successful entrepreneur. In China, such success is inconceivable without forming a relationship with the Communist Party. Indeed, Ma is himself a card-carrying member of the Party, and has pledged his allegiance to Xi. It is my belief that, aware of this perception, Ma put on an elaborate charade of opposing the Xi administration, with the aim of putting the United States off its guard. When you consider China’s history of deploying strategy upon strategy, you do not need to be steeped in the intrigues of classical Chinese tales like the Romance of the Three Kingdoms to see that this could be an obvious move.

Playing Japan and the United States

On January 20, after I had written the above commentary on Ma’s disappearance, Ma made his first public appearance in three months, speaking to teachers in regional areas as part of an online charity event. The story was most heavily promoted by the Global Times, the Communist Party’s propaganda paper, and was also picked up by Bloomberg and other overseas media outlets. In his video presentation, Ma of course made no mention of Ant, let alone Chinese finance. The purpose of the event was therefore merely for Ma to show that he was well. This too felt staged.

It suits the Party’s Central Committee to debunk the overseas rumors that Ma is in custody, and it suits Ma to be perceived by the international community as a free and independent private entrepreneur. If it became known that the Xi administration’s true desire is to suppress Ma and place him under the control of the Communist Party, Ant would lose the trust of overseas investors and its ability to attract foreign capital, and that would be bad for both Xi and Ma.

Meanwhile, in the United States, Joe Biden was sworn in as President on January 20. As mentioned above, the Biden administration has inherited a Trump-era plan to ban investment in Alibaba group and Tencent. Xi and Ma would have timed their stunt to serve as a “second act” to mollify Washington’s suspicions. For his part, President Biden has ditched Trump’s “America First” policy, with its hard line on China, and reverted to a softer, multilateral-cooperation-based approach. It remains to be seen whether Biden has the resolve and the faculty to stave off the expansion of Chinese totalitarianism.

Even more concerning is the stance taken by Japanese Prime Minister Suga Yoshihide. Tokyo is seeking to combine a policy of harmonization with China with one of cooperation with the United States. If things continue as they are, Prime Minister Suga could fall into the clutches of the Xi administration.

(Originally published in Japanese. Banner photo © Pixta.)