What We Know About China's 'Digital Money' Plan

Cashless in less than a year... What we know about China's 'digital money' plan... Closer than you might think... Money with an expiration date... The biggest threat to privacy in today's world... The 'hard asset' to own...

The Chinese government wants to eliminate cash within the next year...

As our colleague Dr. Steve Sjuggerud and analyst Brian Tycangco wrote in their latest issue of True Wealth Opportunities: China...

If Beijing gets its way – and it usually does – there will be one new aspect to the Olympics set to take place next year...

That's the complete absence of physical cash. No paper bills. No coins. Just digital currency.

You see, China is set to host the 2022 Winter Olympics starting next February. And by then, the Chinese government wants to prove on a global stage that the country doesn't need paper money anymore... It wants to show that it's leading a kind of digital revolution.

When Steve and Brian shared this story, it caught us a little bit off guard. But after thinking about it, we probably shouldn't be surprised at all... for a few reasons.

The first is that history is repeating itself...

Merchants living in this part of the world during the seventh-century Tang Dynasty reportedly invented paper currency. They needed an alternative form of payment because coins were simply too heavy and bulky to lug around. Eventually, the ruling government got involved and started to manage the paper currency supply.

Today, thousands of years later, the Chinese government wants to be the first to do the same thing with digital currency – via an e-yuan or digital renminbi.

Now, this isn't an out-of-nowhere idea...

We've been hearing about China's ambitions to make cash extinct and start using a fully digital currency for years.

The Chinese government started researching Digital Currency Electronic Payment ("DCEP") back in 2014 and ramped up efforts in 2019 after social-media giant Facebook (FB) did not include the yuan in its now-failed Libra project...

And just recently, Brian wrote about the push for central bank digital currencies (CBDCs) here in the Digest.

But today, we now see a relatively short timeline for China's 'digital money' rollout...

This means it's time to get serious about the topic... and share precisely what we know about China's plans so you can prepare for our cashless future – whenever that may be.

As we'll explain today, this push by the Chinese government will have far-reaching consequences on a variety of fronts eventually – if not in the immediate term...

The development of a digital yuan touches the heart of the global financial system – China is the world's second-largest economy, behind the U.S. – and it intersects with many major themes in our world today. Just a few to start with...

• The ideas of convenience, trust, technology and privacy concerns
• The impact on the U.S. dollar and how other major currencies might be created, stored, and spent one day
• How assets "outside the system" like bitcoin, gold, or silver fit into this story

Brian shared great thoughts in a two-part series in Steve's free DailyWealth e-letter earlier this week (here and here)... And we want to get into more of the details today.

We'll start with the timing...

China is farther along with this plan than many people outside of the country might imagine...

Back in October 2020, for example, the South China Morning Post reported...

A sovereign digital currency being developed by the People's Bank of China (PBOC) has been used for more than 1.1 billion yuan (US$162 million) worth of transactions as part a series of ongoing pilot programmes, according to a deputy governor at the central bank.

Speaking at the Sibos banking and financial conference on Monday, Fan Yifei said 3.13 million transactions were processed using the currency, which has been undergoing tests for much of the past year in major cities, such as Shenzhen and Xiongan. Pilots also will be conducted at the coming Winter Olympics in 2022.

The pilot programmes made "positive progress", with more than 6,700 use cases implemented as of late August for transactions ranging from bill payments and transport to government services, Fan said.

As Brian and Steve wrote in the March issue of True Wealth Opportunities: China...

Last May, trials of the digital yuan were finally conducted in major cities like Shenzhen, Suzhou, and Chengdu. They were soon expanded to include Guangzhou, Hong Kong, and Macau.

Another trial was conducted in October in Shenzhen. The government gave away $1.5 million worth of digital yuan to 50,000 random citizens. The same was done in Beijing last month.

This past February, an even bigger second trial took place... Chinese e-commerce giant JD.com (JD) handed out a total of $4.6 million worth of digital yuan to random individuals who had downloaded the DCEP digital wallet.

This brings us to the second idea...

What will a Chinese 'digital currency' look like?

If you've used or heard of digital-payments apps like PayPal (PYPL), Venmo, or Apple Pay before, it's what you might expect. As Brian and Steve wrote about the digital yuan...

Its goal is to function exactly like cash, even when there's no Internet connection. And just like paper currency, it's completely centralized and controlled by the central bank.

To use it, people would download a DCEP digital wallet, just like any ordinary mobile app. From there, they could receive digital yuan from their banks instead of actual cash.

That part seems fairly straightforward, though the fact that money will go from the physical world to the digital world brings with it all kinds of considerations – like security and privacy concerns – that we'll get into in a bit. But first...

The groundwork has been laid for years...

Anyone who has visited China recently knows that cash is already nearly extinct in the country.

One of our favorite parts of the documentary about China that Steve produced in 2019, New Money: The Greatest Wealth Creation Event in History, is a scene with famed investor Jim Rogers that shows this concept at work...

Jim couldn't buy ice cream in Beijing because all he had was cash. The vendor felt so sorry for him, she ended up giving the American multimillionaire a scoop of ice cream for free.

(As an aside, Steve's documentary now has more than 9 million views on YouTube. You can watch it for free on YouTube here.)

Paying for something by using an app on your phone is a regular part of life in China, especially for the younger generations. WeChat Pay and Alipay from Alibaba (BABA), the most popular of these apps in China, have nearly 2 billion users.

Take a look at the booming trend in mobile payments use in China, as Brian shared in DailyWealth on Monday...

At the same time, as Brian wrote in Tuesday's DailyWealth about cash in China...

From a high of 15% about a quarter of a century ago, the amount of cash in circulation relative to broad money (e.g., cash, savings deposits, time deposits, and checking accounts) has fallen to less than 5%.

To put that figure into perspective, the same ratio in the U.S. currently stands at 27%.

So China already has the framework and the groundwork set for digital currency to be widely used as the form of currency of record, so to speak... And it has the motivation of the ruling government to make it happen.

People want convenience, governments want power and get in the way...

Thousands of years ago, those merchants in present-day China started using paper currency out of convenience.

While traveling and trading, they found it useful to leave heavy coins behind with a trusted person who recorded on paper how much money had been left... Enough people agreed to the system that merchants could then buy things with the paper notes, which promised they would pay in coins later.

Of course, it didn't take long before the government stepped in to take over the role of the "trusted person"... and started screwing things up. The government began holding coins while issuing more and more notes... It was the seventh-century equivalent of today's central-bank "money printing."

Nowadays, largely the same story is playing out... In these pilot programs, folks are holding money in a "digital note." But in today's world, "digital" of course means people have more access to information – and quicker – than the good ol' ink and paper days.

For example, you used to have to go searching for someone's college thesis in the bowels of a library in a specific location. Today, you can find the newest reports online almost as soon as they're published.

And the same thing goes for information like payment history, buying patterns, location data, and the like. In many ways, people give this up in exchange for the convenience of using apps and other software to make life "easier."

But easier doesn't always mean "better." As Brian wrote in the March 25 Digest...

The digital aspect of a CBDC makes it easily traceable. Goodbye anonymity.

That's bad news for drug dealers and money launderers. But it's equally bad news for the average Joe who wants to buy some gold, silver, or crypto to tuck away without Uncle Sam finding out.

Yes, a CBDC in its purest form is probably the most invasive tool of government against our privacy. It's tantamount to having the government – your central bank – point a video camera at your wallet 24 hours a day, seven days a week.

If that sounds like a big deal to you, I agree. It is.

A digital currency is, without a doubt, the biggest threat to privacy in today's world. More from Brian and Steve in True Wealth Opportunities: China...

It's a bigger threat than having cameras pointed at you in your home. Even bigger than a "social credit score," where an algorithm might determine whether you're able to travel, take out a loan, or even own a pet.

Why? Because cash is the ultimate tool of anonymity.

There are things that you just don't want or need your government to know about. Whether it's buying a pack of cigarettes, losing a few rounds at poker night with the boys, or making an anonymous donation, cash gives you privacy.

But that all goes away with a digital currency... especially one that's created and backed by the central bank.

Brian and Steve wrote that the Chinese Communist Party, the ruling party in Beijing, says the digital yuan will have "controllable anonymity" and that personal information will be protected while the central bank focuses on catching illegal activities. We'll see...

If this sounds like some dystopian 1984 type stuff, we're right there with you...

According to a story from the Wall Street Journal over the weekend, China has tested the digital yuan to be fully programmable.

Specifically, it has tested expiration dates for money... which would encourage holders to spend it before a certain date. This essentially would allow the government to create and target money to boost specific parts of the economy at specific times.

As Brian and Steve also said, merchants will be required to take digital currency...

Once the digital yuan is launched, it gives the government too much power over every aspect of a person's life. Consumers won't be able to count on their privacy in any transaction – down to what brand of underwear they bought at the department store.

If, heaven forbid, your government decides to prevent panic-buying during an emergency by locking your digital yuan wallet, you're going to be in big trouble.

We think even the most optimistic Digest readers out there could see where things could go wrong quickly in a world full of nothing but digital currencies.

Forgetting privacy concerns for a second... It also raises concerns about international trade, currency exchange, and things like the strength of the U.S. dollar, too.

According to a Bloomberg report on Sunday, President Joe Biden's administration is troubled by the long-term effects that a digital yuan may have on the dollar's status as the world's reserve currency.

White House officials have begun ramping up their efforts to understand how the digital yuan will be distributed and whether it works around trade sanctions, according to the report.

We reported on this concern indirectly a few weeks ago in the March 24 Digest, when Federal Reserve Chair Jerome Powell talked about the idea of a CBDC in the U.S., which he said is being researched but a long way from becoming a reality.

In talking about it in public meetings with Congress, Powell essentially said the Fed has been looking into how a U.S. CBDC would look and work... but that he couldn't imagine China's version – a government-owned digital currency app – would go over well in the U.S.

He also said that a decentralized concept – like blockchain-based bitcoin, for example – would not satisfy government wants either. As we've said before, after all, bitcoin and cryptocurrencies are about as "anti-central bank" as you can get.

No wonder Powell and U.S. Treasury Secretary Janet Yellen have gone out of their way over the past few months to bash bitcoin with naughty words like "speculative asset."

As Powell said a few weeks ago of CBDC plans...

I don't think that a system that relies on entirely private governance, completely secret information, about who is owning the digital dollar, would be viable...

And the lack of privacy in the Chinese system is just not something we could do here. There's got to be a balance.

This all sets up for a fascinating story to play out in the months and years ahead...

It's one of money, control, and freedom... all the biggies.

For the everyday investor, as Brian noted in the March 25 Digest, you want to pay attention to the stocks and news around the leading digital-payment apps in the near term, specifically in emerging markets...

A good way to have exposure in the biggest burgeoning e-commerce markets that will benefit from a cashless society is through owning shares of the Emerging Markets Internet & Ecommerce Fund (EMQQ).

The top holdings in this exchange-traded fund include the largest e-commerce firms in China, like Tencent (TCTZF) and Alibaba (BABA), as well as major e-commerce companies in Southeast Asia, Latin America, and Europe.

In China, the digital yuan is being developed in partnership with companies such as Tencent and Ant Financial, which operates Alibaba's Alipay.

In the U.S., at least for now since things could change with different administrations, it sounds like trusted third parties will have to be part of the "chain of custody" of digital U.S. dollars, like banks are today.

Maybe it's something as simple as suggesting that the banks – already regulated by the Fed – integrate more intimately with the digital world... which of course means it would be easier to manipulate dollars than it already is today.

If that's the case, we don't really see any of this hurting the case for bitcoin, which we like as an "inflation-proof" asset designed to circumvent central bank policy – just like gold or silver.

If anything, the development of CBDCs might strengthen the case for decentralized currencies and other "hard assets."

The very biggest threat to cryptos like bitcoin, of course, would be a coordinated government global ban on them... But if you ask experts like our Crypto Capital editor Eric Wade, it's highly unlikely that world powers would be able to get together and pull off something like that.

At the same time, though, certain governments will hate the idea of decentralized currencies more than others and could better control them within their own borders or digital networks.

As Brian explained recently in a video interview with our colleague Daniela Cambone, that's one of the big reasons China is leading the race to a "cashless society"...

In China, bitcoin is very difficult to do. They've already banned bitcoin mining in many places. They are already tightening the screws on the crypto market in China because they know the cryptocurrency market is a way to lose control of capital flows.

The most confounding part of this story for us, though, is this...

At the same time when Powell and Yellen are suggesting people don't speculate in bitcoin and that it can be used for fraud, the Treasury Department at the start of this year began allowing banks to deal in blockchain-based technology like stablecoins.

This is what cleared the way for a company like Visa (V) to settle transactions in bitcoin, and for other banks to work with Wall Street firms to meet customer demand for bitcoin-linked products... The cat is out of the bag.

Maybe it's just that the U.S. government doesn't know what it's doing... It wouldn't be the first time. So, in the end, we'll share the big takeaway from Brian's interview with Daniela, which you can watch in full below...

China is an interesting place to watch. Why? Because China is now setting the trends of the 21st century... A lot of people don't want to look at China but we should be looking at China if not for things that might happen but for things that we don't want to happen or mistakes that we don't want to make in the future.

Stay tuned.

And in the meantime, if you want to read more about this story, check out our True Wealth Opportunities: China product. It's where you can find all of Brian and Steve's research on this major change to how people use money.

They also share why it's an opportunity to pull down triple-digit returns from one of the "outside the system" assets we mentioned today that's set to see demand explode as a result of this change. Existing subscribers and Stansberry Alliance partners can get that part of the story right here.

And if you don't already have access, we've arranged a special offer for Digest readers today... You can get two full years of True Wealth Opportunities: China for 50% off the normal one-year price. Get started right here.

China's 'War on Cash'

The Chinese yuan is going completely digital... It's not a hypothetical anymore, says Brian Tycangco, analyst for True Wealth Opportunities: China. He talks with Daniela Cambone about this monumental step in the global economy...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 4/14/21): CBRE Group (CBRE), Richemont (CFRUY), Comfort Systems USA (FIX), IQVIA (IQV), LGI Homes (LGIH), Markel (MKL), Invesco High Yield Equity Dividend Achievers Fund (PEY), and Alleghany (Y).

In today's mailbag, feedback on Mike DiBiase's Wednesday Digest and more thoughts on working from home. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I really enjoyed 'The Biggest Threat to Markets Today' and believe the thinking is right on. That said, it is not something that I look forward to. It would be very interesting to hear the counter point to the premise we will enter a period of rising inflation that will be bad for the stock market. I believe we have been in an environment of significantly high inflation (>5%) for years." – Paid-up subscriber Ken S.

"A real great piece. Even seasoned investors miss the message though. It might help to educate them about the Federal Reserve not being federal and what it really is. A long time ago when I started my career, one person bought a home for $75,000.00, That was above what I thought it was worth. I thought he was a freaking idiot. Less than 3 years later, he sold it for north of $150,000.00, and I thought he was a freaking genius. After thinking about it, I realized I was wrong both times. He parked his money in real estate while our dollar tanked due to inflation. He maintained his 'worth' while that occurred.

"I do everything I can to inform my gang about inflation, which is really preplanned currency-unit-devaluation.

"About our national financial condition... Take the zeros off and explain it like a family's financial statement. As long as income exceeds spending, everything is OK. They can even take on service debt as long as income is higher than their total spending. Whenever spending exceed income, there is no possible way it can work. Getting more credit cards solves nothing, just makes it worse.

"Now add all the zeros back, replace credit cards with issuing IOU treasury debt, and the answer is the same. Our money became currency, became a blank check drawn on an empty account. The story is long, but our ability to write checks is coming to an end.

"A fed-coin will not do anything to make inflow greater than outflow. That problem remains, and any fake-fed crypto is just another extend and pretend ploy. I have sent a reply containing this part before. Where does government revenue come from? Taxes and fees. Why not just raise taxes? On who? The poor have no currency. The rich and corporations have purchased tax avoidance with campaign contributions, and the middle class cannot pick up the slack. Revenue must increase by collecting more taxes, or spending must go down, there is no other answer. Everything else said about it is slick gifted b&^%#$@t. It might sound great, but it still stinks.

"Based on what I see and hear from our elected misfits, our fake fed, and all our talking heads, 'All ye who enter, abandon all hope.'

"China can just walk into the vacuum we are creating. At least they have a long range plan, they groom their successors, and they stick to that thought out long range plan." – Paid-up subscriber Bernie B.

"Corey, thank you for sharing your thoughts about your experiences working at home during the pandemic. There are other perspectives that have occurred to my wife and I. We are both in our 80s and both are retired; however, we are enjoying the fourth stage of our careers. The four stages are learning, practicing, mastering, influencing.

"We helped found a wonderful company, CleanFiber, LLC. And we both have other careers; for example, my wife was President of the Maine Science Teachers and has written seven books mostly about education.

"So, we have been working from our home offices for years before the pandemic and, so, took it in stride. We are lucky, especially with most of our eight grandchildren living nearby here in the State of Maine. Nevertheless, not being able to be gregarious as in the past tends to challenge us all. So when we looked at the tea leaves and saw our nest egg losing 5% buying power per year, we said that we ought to think about investments beyond the stock we own in CleanFiber. With the extensive study of gurus like Dr. Sjuggerud, we have developed an approach to investing...

"Therefore, here are some other perspectives on the subject of working from home...

• Elderly folks can challenge their minds through many sources available online like never before in human history

• Obviously, the surge in home work stations is driven in part by the desire to have larger type for older eyes

• My father worked for the National Safety council; he originated, 'The life you save may be your own'; and 'He died defending his right of way.' Clearly, less travel means less highway deaths

• Now that our progeny are home a lot, we notice very good parenting

• We now have more time to interact over Zoom and to attend webinars; Inspired by Dr. Sjuggerud, I have subscribed to TradeSmith and am learning from all the tutorials and have been able to approach TradeStops and other fruits of analysis very beneficially.

"Thank you." – Paid-up subscriber Dan T.

"Corey, I'm in engineering and have been in the office right through this whole thing. Ernest Hemingway and F. Scott Fitzgerald may have done some of the grunt work in their homes, but there are certain types of creative endeavors that can't be dreamed up by staying home. I think you should stop writing about the flu, take off your face diaper, and get out of the house." – Paid-up subscriber Robert G.

Corey McLaughlin comment: Points taken... though you won't hear me suggest wearing a "face diaper" in the house. I always thought it made sense to open the windows instead.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 15, 2021