22.01.2014 Author: Sofia Pale

USA–China: the last battlefield – bitcoins

bitcoin-645x250In recent years, China has made a transition from a “soft” force to launching a rather rigorous offensive on the leader of the current global economic system – the United States. This was facilitated by the financial crisis of 2008, which started in America and spread across the whole planet, as well as the slow response of the Western world, in general, to the skilful manoeuvres of the Celestial Empire’s Eastern policy targeted at the gradual shift of the dollar from its dominant positions, and in quite original ways.

To begin with, China demonstrated positive dynamics of its economic growth in the crisis years and proposed to its partners to trade with it directly in the yuan, bypassing the “middleman” dollar. Russia was the first to respond by the launch in 2010 of trading in yuan/rouble at the Moscow Interbank Currency Exchange (MICEX), which also became the yuan’s first stock exchange outside China and Hong Kong. In the middle of 2013, direct trading in the Chinese yuan began in the Australian stock exchange, and in December of the same year the yuan was declared the world’s second most traded currency behind the US dollar, leaving the euro in third place.

The most intense economic fighting developed in the geostrategic zone where the American-Chinese interests match – the Asia-Pacific Region, where by 2004 China had established a FTA with a number of ASEAN countries, Hong Kong and Macao. In 2009, trying to strengthen its position here somewhat weakened after the crisis, the USA – faced with the growing influence of China and Russia in the region – started promoting the concept of Trans-Pacific Partnership with thirteen most developed APR states, including Japan, Australia, New Zealand, Malaysia and Singapore. The Chinese side responded with the establishment of the world’s largest ASEAN-China FTA in 2010.

The USA pulled its socks up, and, in 2012, after five-year negotiations, South Korea agreed to ratify a FTA agreement, which had become the USA’s biggest trade agreement since the signing of the North American Free Trade Area (NAFTA) agreement with Canada and Mexico in 1994.

Earlier on, the geostrategy had led China to the signing of FTA agreements with the USA’s Latin American partners – Chile, Peru and Costa Rica.

In 2013, a battle unfolded between China and the USA for the European market, with which the American side is only planning to establish a FTA, whilst China has already started this process by having decided to make the London Stock Exchange the main trading platform for the yuan and by having signed, in practice, FTA agreements with Iceland and Switzerland, for the first time in the history of European-Chinese relations.

At the same time, China has been firmly pursuing the policy of forcing the US dollar out of the mediation in the international trade and signed swap agreements on national currency exchange (bypassing the US dollar) with two dozen states around the world. In 2012, Beijing concluded agreements on direct payments in the national currencies in the bilateral trade relations with Russia, Japan, Brazil and Indonesia. In 2013, they were joined by Great Britain and Australia, with the latter agreeing to fully promote the yuan as the world’s reserve currency – the status which the Chinese leadership has been dreaming of in recent years. Among the biggest of the latest currency swap agreements is the agreement with the European Central Bank, signed in October 2013, for a maximum amount of 350 billion yuan (45 billion euros).

In the ASEAN and BRIC blocs, these agreements have led to the creation, at China’s initiative, of relevant impressive funds which operate avoiding the American-European IMF.

On top of that, the Celestial Empire has been actively accumulating gold and currency reserves, which, during the 2004-2013 period, increased to such extent that they are now large enough to buy the gold reserves of all the world’s central banks twice.

When there was no slightest doubt in the yuan’s strength left anymore and the US FRS’s unlimited dollar printing started arousing a “sports interest”, a fundamentally new concept of money – bitcoins – emerged for economists to judge. These electronic currency (cryptocurrency) and electronic payment system appeared on the Internet in 2009 thanks to developers hiding their identity under a Japanese pseudonym. People began to assign to virtual bitcoins, which were not tied to any currency rate, all sins and virtues at the same time. Economic “guru”, former Chairman of the FRS of the United States Alan Greenspan has recently assured that bitcoins, which are not supported by anything, are a mere “bubble”. However, all the world’s leading mass media began regarding bitcoins as the “murderer” of the US dollar and, thus, have largely contributed to creating frenetic interest around this fundamentally new phenomenon in the international economy.

No matter what bitcoins are, there is no doubt about one thing: their value has increased from 10 dollars in 2012 to 1,200 dollars in November 2013. The blame for such a rapid growth of demand is on China, whose trading platforms have concentrated approximately 60% of the total amount of bitcoins. The US FRS is to blame to a significant extent as well – on seeing the cryptocurrency’s potential, the Federal Reserve Service decided it was a legitimate financial instrument. The Bank of America Merrill Lynch also actively supported the new type of money. Chairman of the US FRS Ben Bernanke cautiously pointed out that electronic money could present certain risks for law enforcement and financial oversight bodies. At the same time, it can also have certain advantages in the long term in that case if virtual currencies are able to offer a more rapid, secure and effective payment system.

Finally, at the end of November 2013, the American bank of JPMorgan Chase decided to introduce its own electronic payment system Internet Pay Anyone (IPA), which is similar to bitcoins – the only difference is that operations with this cryptocurrency will be subject to an appropriate tax and will be regulated by money laundering law.

Prior to that, the idea of the taxation and legitimisation of virtual currencies (there are several types of them, apart from bitcoins) had been welcomed by Germany.

But just a few days after the optimistic statements of the American side, the Central Bank of China dropped bitcoins’ value by 50% and prohibited financial organisations (but not natural persons) from engaging in virtual currency operations.

Another wave of information about bitcoins spread across the world, but this time there was a rather negative connotation.

However, analysts are looking deeper, and they believe that, through prohibition, China is trying to protect bitcoins from the risks and enhance its credibility among the users.

The complexities of the Celestial Empire’s financial manoeuvres are not so easy to discern, but it looks like this is exactly what financiers on the other side of the planet are currently trying to do – figuring out what step the USA should make next in the field of the economic battle against China.

Sofia Pale, Candidate of Historical Sciences, research fellow, Centre for Southeast Asia, Australia and Oceania Studies at the Institute of Oriental Studies RAS, exclusively for the online magazine “New Eastern Outlook”.