| Surging inflation in the U.S. versus slowing growth in China
U.S. Federal Reserve Chair Jerome Powell has stated that the central bank is prepared to raise rates in order to cool rising inflation, with betting markets forecasting that the Fed could hike rates up for four times this year.
However, while the U.S. housing market is considered by many to be overheated—November new home sales surged 12.4%, China’s property market has continued to weaken, with new home sales falling 0.3% month-over-month during the same period.
Facing a slowing economy, China has begun reducing loan rates. The People’s Bank of China (PBOC) recently cut two key benchmark rates in an effort to reduce borrowing costs.
And last month, the central bank also lowered the reserve requirement ratio—another tool central banks can use to affect economic growth.
Banning crypto but building bridges Where else have policies diverged? China has taken a hard-line stance on cryptocurrencies, declaring transactions involving them to be illegal and stating that those caught will be prosecuted.
This ban has unseated China as the world’s largest bitcoin miner, and now the U.S. accounts for over a third of mining.
While China has banned cryptocurrencies, it will likely be the first major economy to issue a fiat digital currency. Just in time for the 2022 Beijing Winter Olympics, China—the country that first used paper fiat currency—has rolled out the e-CNY wallet on both iOS and Android app stores.
The U.S. still seems unsure as to whether it will wade into the digital currency waters. Powell stated earlier this month that the central bank’s long-awaited white paper would be published "within weeks," and that while it will "take some positions," "it's more going to be an exercise in asking questions and seeking input."
However, before the document has even been released, opposition has mounted. U.S. Rep. Tom Emmer has drafted legislation "prohibiting the Federal Reserve from issuing a central bank digital currency (CBDC) directly to individuals."
As the U.S. figures out the next steps surrounding a potential digital dollar, China has moved another step ahead.
Yes, a central bank digital currency has the potential to improve financial inclusion and reduce the cost of cross-border remittances for individuals. However, the economic benefits are even more significant for corporations. Using a CBDC bridge could reduce the time of a cross-border transaction from days to seconds.
The mBridge project involves cooperation between the Bank for International Settlements, the central banks of Thailand, Hong Kong, the United Arab Emirates, and the Digital Currency Institute of the PBOC. The multilateral project recently revealed 15 use cases involving 22 private sector participants.
With China's first-mover advantage in digital currencies combined with significant infrastructure investment through its Belt and Road Initiative, the tale of the world's two greatest superpowers following their own, separate paths is likely to continue.
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