Running silently beneath the outcry over TikTok and We- Chat is the advancement in the development of China’s sovereign digital currency — the Digital Currency Electronic Payment or DCEP.
The structure of this is described as “one currency, two addresses, three centres”. “One currency” refers to DCEP itself. “Two addresses” refers to the data centres run by the People’s Bank of China (PBoC) and the commercial banks. They are connected with DCEP’s central blockchain ledger. The currency is distributed to these addresses and then to the broader economy. The “three centres” are the newly created Registration Centre, Circulation Centre and Big Data Analytics Centre. The Registration Centre applies “know-your-customer” rules to new users and issues credentials based on individual profiles. The Circulation Centre records the issuance, transfer and settlement of all transactions while the Analytics Centre focuses on risk management and will include both money laundering and anti-corruption measures.
Unlike Bitcoin and other private currencies, DCEP is legal tender. US President Donald Trump’s weaponisation of the Society for Worldwide Interbank Financial Telecommunications (SWIFT) settlement system for dollar transactions and international transfers has accelerated the rollout of the DCEP.
It also signals a change in the international monetary system as it comes under increasing threat and manipulation for purely political purposes. The dollar standard is seen by many as increasingly outdated in a world where the US no longer dominates the global economy and trade.
Chinese consumers are rapid adopters of new payment systems. Mobile payments like Alipay and WePay have grown exponentially and DCEP will complement this growth. The digital Yuan gives the central bank a better overview of transactions. This helps shrink the black economy, reduces corruption and increases the tax collection success of the central government. This builds on the success of the Lancang-Mekong development plan in Yunnan where the use of WePay was encouraged as a way of reducing cash transactions.
In the longer term, we expect to see the DCEP used in trade and international transactions. The tourism industry would be an early adopter although DCEP is also a logical next step following the recent blockchain settlement of commodity contracts.
The Belt and Road Initiative provides an opportunity to expand the use of the digital Yuan outside the borders of China. Foreign companies transacting with Chinese companies for supplies, workers being paid wages and financing of projects through digital Yuan loans are all possible ways in which the digital Yuan could be put into circulation through China’s infrastructure building program.
Blockchain ledger foundations allow for instant settlement which resolves issues of trust in cross border transactions. If the digital Yuan provides the prospect of greater internationalisation and a foil against SWIFT weaponisation, then China may relax the regulatory barriers that stand in the way of effective internationalisation.
Technical outlook for the Shanghai market
The Shanghai Index has retreated from the consolidation area and is moving the retest the strength of support created by the upper edge of the long-term group of moving averages. This is the first support feature. The previous index retreat on July 27 used the upper edge of the long term GMMA as a support rebound area.
The second support feature is the value of the long-term uptrend line A. This is currently located around 3,200 and falls in the lower half of the long term GMMA group. This trend line has not been tested as a support feature since May 20.
The third support feature is the value of the lower edge of the long term GMMA group of averages. This is currently around 3,165. A fall to this level indicates a higher probability of developing into a trend change so traders will exercise strong caution if the index falls below the uptrend line A.
Currently the long term GMMA is well separated. The long term GMMA is a guide to the way investors are thinking. Good separation in this group suggests investors remain confident. When the index falls, they come into the market as buyers.
Compression in the long term GMMA shows some investors have become sellers and this is a leading indication of a trend change. A small degree of compression is acceptable in a strong market retreat. This was observed on July 27. The very small compression gave investors and traders the confidence to enter the market in anticipation of a renewal of the uptrend. They will look for the same conditions in response to the current market retreat.
Rapid compression in the long term GMMA will signal a trend change and this will be confirmed with an index move below the lower edge of the long term GMMA.
