BNP AM

The sustainable investor for a changing world

ESG boost is flipside to China’s ban on bitcoin

China is cracking down on bitcoin in a bid to overcome problems such as power shortages, climate control, financial disruption and the creeping erosion of its monetary policy sovereignty. At the same time, Beijing is embracing distributed ledger technology (DLT) to help improve its environmental, social and governance (ESG) performance.  

This is an abridged version of China bans bitcoin, embraces DLT with ESG implications by Chi Lo

Read the full version here

Since May 2021, China has intensified its clampdown on cryptocurrency trading and mining. In June, the Qinghai provincial government banned all bitcoin mining and several other regions quickly followed. In July, the State Grid issued a nationwide notice requesting the closure of all crypto mining operations and disconnected them from its network.

The economic and environmental factors

Dealing with power shortages and targeting climate control underpin Beijing’s ban on bitcoin. China aims to reach peak carbon emissions in 2030 and be carbon neutral by 2060. These are tall orders because 

  • China’s projected emissions peak is much higher than those of the US and the EU
  • China’s timeframe to achieve carbon neutrality is much shorter (30 years after the peak) than for the US (45 years) and the EU (71 years). 

The industrial sector, which accounts for 80% of carbon emissions, will have to shrink and shift from its current 67% reliance on coal towards clean energy. However, progress with renewable energy sources such as hydro, wind and solar power has not been fast enough to offset the fall in energy supply from reducing coal output.

Torn between mining more coal to alleviate power shortages and committing to its carbon emissions reduction goals, China is favouring the latter.

Banning cryptocurrency mining, which uses a huge amount of energy, is a major step in cutting energy consumption. The impact has been significant (Exhibit 1).

The People’s Bank of China (PBoC) has intensified its crypto-trading crackdown since May 2021, effectively outlawing all crypto-exchanges and services in China.

Beijing embraces DLT

Despite China’s anti-crypto moves, it has been developing an official digital renminbi. It is embracing distributed ledger technology for the benefits it could bring to its financial system and monetary policymaking.

Cash usage is declining, which erodes monetary control and transmission. And a small number of private payments providers now dominate the payments system, affecting privacy, security, access and competition. The PBoC sees this as a risk to its policy sovereignty. So by offering a digital platform for transactions and payments in the decentralised e-payment infrastructure, it is trying to cater to the public’s demand for such services.

Beijing realises that DLT could underpin the development of a digital renminbi with wider applications such as virtual finance and financial inclusion. Banks are already starting to use DLT to automate functions such as regulatory reporting and risk management.

Digitisation can reduce transaction costs, speed up processing, increase regulatory oversight and reduce risk. Central bank digital currencies (CBDC), such as the e-CNY, can reduce costs and inefficiencies by using DLT to standardise operational and settlement systems, allowing cross-border payments to be settled almost instantly.

The social aspects

Financial inclusion could be an important social benefit. With a significant number of people still without bank accounts, the e-CNY would let them access banking services through digital wallets and digital bank accounts. This would go a long way to helping reduce wealth and social inequality, a key goal of President Xi Jinping’s “common prosperity” policy. The financial services sector is currently carrying out trials.  

Since late 2020, there have also been trials linking the e-CNY to local transport systems, with free e-CNY being given to residents as an encouragement to take public transport. Used in this way, the e-CNY facilitates carbon neutrality and creates environmental and social benefits.

Monetary policy sovereignty & governance

There are strong motives for China to drive out bitcoin, develop its e-CNY and embrace DLT.

Firstly, the programmability of an e-CNY should allow the PBoC to implement with greater accuracy its targeted monetary policy, boost financial inclusion and even use ‘helicopter money’ by injecting liquidity into specific areas of the system, thereby strengthening monetary policy control and transmission.

Secondly, in a no-physical-cash system, which seems to be the way things are moving, an e-CNY could remove the zero-lower-bound constraint on monetary policy by allowing the PBoC to use negative interest rates to tackle deflationary shocks and induce economic agents to cut savings and spend more.

China’s two-tier e-CNY system combines a centralised architecture and a distributed architecture to create ‘controlled anonymity’, rather than the ‘untraceable anonymity’ of private-sector cryptocurrencies. While the potential applications of DLT are still under development, the PBoC has indicated that the e-CNY would include central features such as cryptography (to enhance privacy and security) and programmability (to allow automatic execution of transactions based on smart contracts with pre-defined criteria). 

Internationalisation not a priority

The e-CNY’s legal status and centralised nature give it the governance backdrop for promoting the international use of the digital renminbi. However, China is in no hurry to push internationalisation.

While the cross-border use of e-CNY for retail purposes could act as the starting point for wider use down the road, the renminbi’s status as a global currency fundamentally depends on China opening up its capital account; the depth, liquidity and transparency of domestic capital markets; and the credibility of monetary policy. This will be a long road for China to navigate.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

Credit events in China (I) - The macroeconomic impact
14:45 MIN
Market weekly – Confidence in storm-hit China should return (listen or read)
Weekly investment update - Stagflation chatter
BNPPAM

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

FOR INSTITUTIONAL AND FINANCIAL PROFESSIONAL INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2021 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.