In the News: Grim Economic Prognosis; Mastercard Approval; and Digital Currency Patents
February 17, 2020 | BY
Vincent ChowCoronavirus drags down Chinese economic growth forecast; Mastercard approved to set up card clearing business in China; and PBOC files patents ahead of digital currency rollout
Chinese economy hit hard by coronavirus epidemic
The number of confirmed coronavirus infections in China surged massively last week as Hubei province switched to a new set of diagnosis criteria, inflating the total figure to more than 68,500 cases and 1,665 death as of Feb. 17. As the epidemic continues to spread throughout China and beyond, the economic impact of the virus is becoming increasingly clear. On Feb. 11, British bank Standard Chartered revised down its 2020 growth forecast for China's economy from 6.1% to 5.8% due to the epidemic. However, a Reuters poll of 40 economists said the downturn will be short-lived if the outbreak is contained soon, although they agreed that the Chinese economy will plunge to its slowest rate of growth since the financial crisis, 4.5%, in the first quarter of 2020.
The Chinese government has imposed strict travel restrictions around the country, which has significantly disrupted logistics networks and supply chains. More than 60 airlines have suspended more than 2,000 international flights to China, according to VariFlight, an aviation statistics provider. Research firm Strategy Analytics estimates that China may see smartphone shipments plunge 30% in the first quarter of 2020 because of the coronavirus. China makes 70% of the world's smartphones. For U.S. tech giant Apple, global smartphone shipments could drop by 13% in Q1 due to disruption to the Henan-based operations of its main supplier Foxconn, Strategy Analytics estimates. The automobile industry has also been hit hard by the epidemic due to China's oversized role as main source of parts for many major automakers. Reuters reported that South Korean car giant Hyundai Motor's main Chinese supplier is scrambling to make up for production shortfalls, while other car giants such as Volkswagen, Ford, Fiat Chrysler and Daimler have also seen their suppliers' operations disrupted.
The timing of the coronavirus outbreak so quickly after the signing of the phase one trade deal between China and the U.S. has thrown into uncertainty whether China will meet its purchase commitments as part of the deal. China has pledged to increase purchases of U.S. goods and services by $200 billion by the end of 2021. However, the ongoing epidemic might hurt Chinese companies' ability to make these purchases. Craig Allen, president of the US-China Business Council, told Reuters that he was confident China will still meet its purchase commitments, although the timing of purchases might be affected. A report released by the group representing U.S. companies in China on Feb. 13 revealed that only 22% of its members would use the trade deal's dispute resolution mechanism should a non-compliance issue arise.
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Mastercard approved to enter China
Mastercard Inc. has received regulatory approval to enter China's $27 trillion payments market. The People's Bank of China, the nation's central bank, announced on Feb. 11 that the U.S. card payment giant has been approved to set up a bank-card clearing business in the country through a joint venture with a local company. The bank said that Mastercard and its partner NetsUnion Clearing Corp. must complete preparation work for starting operations within a year.
In January, American Express (AmEx) saw its application to start a bank-card clearing business with its local partner in China accepted by the central bank, although final approval has yet to be given. AmEx and fellow U.S. card payment giants Mastercard and Visa have been trying to enter China's burgeoning payments market for many years. Their delayed entrance has long been a source of frustration due to the market size, now dominated by a handful of domestic players including mobile payment heavyweights Tencent and Alibaba. Visa is still waiting for its bank-card clearing application to be approved after several years of delay. According to Chinese financial news website Caixin, China had 8.2 billion bank cards in circulation at the end of September.
Securing access to the Chinese market for U.S. card payment companies was a provision of the partial U.S.-China trade deal signed in January. China promised to take no longer than 90 days to consider applications by card payment companies from hereon, with Mastercard, Visa and American Express explicitly mentioned in the text of the agreement. China's card payment market has traditionally been dominated by the state-run China UnionPay Co. In June 2015, foreign bank-card clearing operators were allowed to obtain local licenses for the first time by setting up local units or acquiring local companies.
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PBOC files patents outlining digital currency plans
China's central bank has filed more than 80 patents as part of its plans to launch a digital currency, the Financial Times (FT) reported. The patents filed by the People's Bank of China (PBOC) include proposals to do with the issuance of the digital currency, interbank settlements utilizing the currency, as well as the integration of digital currency wallets with retail bank accounts. The majority of them are attributed to the PBOC's digital currency research arm, with some others attributed to state-owned corporations and subsidiaries.
China launched its digital currency project in 2014 with the working title DC/EP (Digital Currency/Electronic Payments). The FT report suggests that China may plan to algorithmically adjust the supply of its digital currency based on various measures such as loan interest rates. Other patents outline mechanisms to do with making deposits in existing bank accounts, which can then be exchanged for digital currency. "Virtually all of these patent applications relate to integrating a system of digital currency into the existing banking infrastructure," Marc Kaufman, a patent attorney at Rimon Law, told the FT.
China is leading the world with efforts to launch the first state-backed digital currency. Many believe that China has accelerated its plans due to the threat posed by Facebook's controversial digital currency plans, Libra. Reports of both China and Facebook's projects have raised alarms among governments around the world worried about China's growing financial and technological might. In January, the Bank for International Settlements set up a group to explore interoperable central bank digital currencies including the Bank of Japan, Bank of England, and the European Central Bank.
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