How China can face potential threat from Facebook’s Libra

Back in June, David Marcus, head of the Facebook Libra project, had announced that Libra will be tied to a basket of low-risk securities and traditional, government-issued currencies such as the dollar, the euro, the pound, and the yen.

Currently, the Chinese renminbi is absent from the currency basket, and one Chinese perspective has been that Libra did this on purpose.

Suggested solutions to Libra’s basket of currencies

Since the financial crisis in 2008, and increasingly more so with the ongoing trade war tensions, China’s distrust towards the White House and the future direction of the US Cabinet has been growing.

The question from Chinese policymakers now is, will the ongoing tension between China and the US stop under US President Donald Trump’s administration? Has the US attitude towards China as previously an export/import-oriented developing country changed forever?

The Economist articulated where China and the US stand right now in 2019. And according to the report, the tension will take a while, if ever to resolve.

The Chinese media has reported that with Libra, the US has achieved its goals by excluding the renminbi.

New York Times tech reporter Nathaniel Popper pointed out the contradiction on Twitter: “Two things the head of Facebook’s cryptocurrency project, David Marcus, said in today’s hearing: ‘We do not want to compete with the dollar’ [and] ‘We would like for Libra to be a digital, global currency.’ FB is likely to face lots of questions about the apparent conflict here.”

Image credit: Facebook

Libra’s endorsed assets do not include the renminbi. One Chinese media outlet suggested the possibility that China may endorse the IMF Coin instead. Earlier this month, International Monetary Fund managing director Christine Lagarde hinted at the Bank of England forum that the organization intends to launch a global currency like Bitcoin called the IMF Coin under the special drawing rights (SDR) mechanism.

The SDR is a special form of super sovereign currency established in 1969, mainly composed of four currencies: the US dollar, the euro, the Japanese yen, and the British pound. Only much later in 2015 was the renminbi added into the basket, following continuous efforts of the Chinese government.

The weight of the renminbi was second only to the US dollar and the euro, but it surpassed the Japanese yen and the British pound. And that was considered to be the most important step in the internationalization of the currency.

Ultimately, we at Global Coin Research don’t think that China’s endorsement of the IMF Coin will be substantial.

Ways China could deal with Libra

Zhou Xiaochuan, president of China’s Finance Association, said that the nation needs to prepare and place the renminbi into a favorable position for internationalization and global competition. The anticipation is necessary to better serve China in its economic development and in ensuring national economic and financial security.

Cheng Hua, an associate professor at the School of Economics at Renmin University of China, said at a fintech seminar recently that there are three main ideas on how the country could deal with the challenges brought by Libra:

Cooperation between large exchanges and the Chinese government

A matter of time