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Episode 39

Can China centralize crypto? 

Published on: July 30, 2020 • Duration: 19 minutes

This week we discuss China’s new central bank digital currency. Should other central banks be looking to follow suit? The chatter looks at the recently non-existent world of US oil company M&As. As the world slowly gets back to normality, will the struggling oil companies have to seek refuge among the industry leaders? In this week's whisper Louisa is joined by David Craig, CEO of Refinitiv to talk about the data behind the data regarding the world of vaccines.

  • [00:00:05] Did you see that headline recently about China developing a central bank digital currency? And that they've now launched it as part of a pilot program? Why is that worth paying attention to? That is today's Big Conversation. Hello, everybody. I'm Louisa Bojesen, and welcome to The Big Conversation. If I were a cartoon illustrator over these last couple of weeks, I would have drawn a young and open-faced Facebook bouncily approaching a grumpy morning coffee table of all of the old central banks. You'd have the Fed sitting there, the ECB, the Bank of England, the Bank of Japan, the People's Bank of China.... Facebook would energetically announce that it's launching its own cryptocurrency, Libra, and you would see all of the old central banks spewing their coffee all over the place, except for the PBOC, who'd be sitting quietly, hands folded, smiling calmly and knowingly. Whether you're a fan of Facebook or not, with their Libra coin announcement, they almost single handedly just ensured that central bank speed up research and development, concentrating on central bank retail digital currencies, especially given where China now is. Let me tell you a little bit more. Already a few years ago, China was rumored to be ahead of the game in this, and they are in the lead, being the first country to actually launch a CBDC, a central bank digital currency, or DCEP (the digital currency electronic payment), which is the actual Chinese currency built with cryptographic technology and blockchain. So this DCEP could be regarded as the world's first CBDC because it's issued by the PBOC. It's a pilot program via the PBOC to trial this digital yuan. How is it structured? What are the building blocks look like? So one part of this digital currency is focused on commercial banks. The other part is concentrating on the public. Now, you might say "I'm already electronic. I use mobile pay" or "I already have my banking card." Yeah, but this differs to your credit card in that a central bank digital currency is backed by the central bank of a government, so the government holds the liability, the government has to maintain reserves and back it up, not a private bank. What does a pilot program for a digital currency entail? Well ideally, you don't just pop up a digital currency and sit on it, you get others involved. And that's exactly what China's doing. They reportedly have local businesses that they're trialing this with. And also, according to the China Daily, the digital currency has been formally included into the monetary systems of the trials, cities with some salaries for government employees and public servants to be paid in the digital currency. So where exactly is this taking place? Well, trials have started a number of Chinese cities, according to media outlets, including in Shenzhen, Suzhou, interestingly, in Suzhou, CNN News says that it's primarily about subsidizing transport, Chengdu and Xiong'an. On a side note, the Xiong'an New Area, as it's called, where CNN News reported that the digital currency mainly would be focused on food and retail, is a large development around 100 kilometers south west of Beijing, which President Xi has played an important role in launching. The whole idea is that this area will be at the forefront of technological innovation and in including larger green spaces to make it more human. The Brookings Institution published an insightful op-ed exactly on this a while back where they summarize how, quote, "a successful Xiong'an profoundly could change China's geo-economic landscape." End of quote. And this again goes back to Beijing being so overcrowded and congested that it needs an area to be able to spill out into. Brookings concludes, quote, "Xiong'an deserves careful attention in years to come." End of quote, And by being part of this digital currency trial, it's definitely put even more on the map. Why should you care, though? Well, you'd be smart in caring because it's the first digital currency operated by a major economy. Sure, there are already digital payment platforms in China. You've got AliPay, you've got Ant Financial, the Alibaba platform, WeChat Pay owned by Tencent, but they don't replace existing currency. And that is the difference. If you replace an existing currency and it's through the central bank, if it's a sovereign digital currency, that means that the central bank can oversee cash flow in real time and it means that they don't have to rely on dollar settlement systems. Crucially, it could also mean less of an impact from sanctions put on, for example, China by the U.S. And it's not just China, the U.S. currently has some type of embargo against around 30 countries or territories. So in the long term, it could benefit countries to have less dollar reliance. Now, the chief economist of the IMF, Gita Gopinath, is quoted as saying that digital currencies, they won't replace the U.S. dollar anytime soon and they won't. The dollar will continue to have its star position in global trade and finance, probably for a long time. Gopinath also highlights etheral aspects like the widespread belief that the dollar is safe and solid. As Ledger Insight says; 'the more the dollar is used, the more it becomes useful to others.' So it's a self-fulfilling prophecy, right? Why should governments bother with virtual currencies? Why should they bother in trying to basically self-destruct? It isn't like they don't already have enough headaches to deal with, right? And the answer is, it depends on the country. As economic situations differ so much. From the point of view of central bank supervision, a central bank digital currency would be massive, from financing big business and government payments, social governance. It would be a really big step. I was reading the IMF blog, they outline why it could be beneficial for central banks to launch a CBDC, and a few of the reasons include: 1. there's a high cost associated with managing and transferring cash. Technology can bring those expenses back down. 2. it means a greater level of financial inclusion. It would be easier and safer for people who don't have bank accounts to access money via their funds. Three. Competition among private companies would mean a greater level of transparency and prohibited actions could be easier kept in check. And 4. Monetary policy could move easier through CBDCs, through these central bank digital currencies. At the same time, the IMF isn't blind to the possible challenges of a digital currency, highlighting issues like, what happens if there are situations where everybody pulls a lot of money out of banks all at once wanting to buy CBDCs, which means that banks, they might need to do things like raise rates on deposits to keep customers, they might need to see a compression of margins or impose higher rates on loans. You also have questions like what happens if there's another crisis and there's a real run on deposits? Two -  central banks - they'd be taking on credit risk and would need to decide how to hand out funds across banks in the event the banks suddenly seeing large and fast outflows. Also, central bank balance sheets could grow substantially if demand is high for CBDC, and as an added headache to many, all of this could set the stage for political intrusion. Three. Well, the entire way oor monetary regulatory system is set up would need to be changed as it's not built to have to do with CBDCs. Regardless when was the last time you heard someone say that there wouldn't be a decline in the use of cash? Everybody is saying cash is disappearing, right? Digital payment platforms will only become even more prominent, so why wouldn't central banks be looking to increase their ability to monitor through sovereign currencies? But this isn't like the recent ruling in Germany, where Ritter Sport won a case allowing it to remain the only chocolate maker to produce square pieces of chocolate, it's not like that. Facebook already remind the Congress that there is no U.S. monopoly on the regulation of next generation payments technology. There is no monopoly full stop. Yeah, after intense regulatory pressure Facebook was forced to change its Libra launch plans. The Libra project will instead, for the time being, support currencies that already exist, as well as the actual Libra token once it's ready for a full launch. But imagine, like it or not, but imagine if central banks continue to develop and implement digital currencies. The surprise here after Facebook's announcement, after the Chinese central bank's digital currency launch, the surprise here would be if nobody else did it. The surprise wouldn't be if others do it. We know that other central banks, including the Fed, are now looking a lot closer at a CBDC. The IMF thinks that central banks would be wise in deepening their knowledge of new technologies needed for the task and learning more about the issues related to a central bank digital currency. To stay as current as what China is, perhaps you and I should, too. 

    Let me tell you a little story. Chevron is buying U.S. oil company Noble Energy in a five billion dollar all stock deal, or 13 billion dollars if you include debt. A couple of weeks ago when we last spoke, we were talking about this massive correction seen in oil due to the Corona pandemic. We've seen severe oil price weakness, now not helped by worsening U.S. China relations, significant spending cuts and revenue declines at the big oil and gas companies as well. Against this backdrop, could a little deal make a bigger difference? Well, it just might. Taking a step back for a second, remember last year, Occidental Petroleum, Oxy acquiring Anadarko Petroleum for fifty five billion dollars? Well, at the time, Chevron wanted in on the company, hence bidding 50 billion dollars for Anadarko in April of twenty nineteen. Ultimately, Oxy ran off with the prize with Anadarko, but it was an expensive price, which included around 40 billion dollars in debt. The immediate reaction from analysts back then to the Oxy/Anadarko tie-up wasn't all that positive. Granted, the current Chevron Noble Energy buy is a lot smaller, but analysts love it. In general, they've praised the shovel noble tie-up regarding synergies regarding debt, incorporation and costs. While to many of us it would be ridiculous to expect a small deal like this to lift oil stocks. It might be interesting in other ways. Seeking Alpha capture the deal as when opportunity meets preparation. And there could be some truth to this senior M&A analyst that embarrass Andrew Ditmar. He told Forbes that Chevron and Noble Energy are a perfect fit, given complementary positions in the Permian. Let me explain a little bit more. Not to be confused with the Permian period, which includes dinosaurs and ended in galore mass extinction. The Permian Basin has nothing to do with dinosaurs, and it's a lot more exciting. It's located in the southwest of the U.S. It's part of West Texas and the southeast New Mexico, and it's the world's biggest shale field. Chevron and Exxon Mobil both want to dominate this area. And in particular, they both want to be the first to pump a million barrels of shale oil per day from the field, with Chevron abandoning the takeover of Anadarko last year. It also abandoned immediately becoming the main operator out of the Permian Basin. But its edge now lies in a game plan where it relies on a bunch of allies. Apart from Chevron's widely noted joint venture with Cimarex Energy, one of the only continuously profitable companies working out of the Permian, they have a bunch of other agreements in place with a bunch of other operators. Now, these operators not only give Chevron part of the oil that they the operators that they produce, but perhaps more importantly, they also supply a ton of data from thousands of wells. And that's crucial. That means that Chevron is able to fine tune its drilling plan of action. The Chevron Noble Energy Deal, it'll expand Chevron Shell presence, including in the Permian Basin, and increased proved reserves by around 18 percent. Chevron also has an interest in getting its hands on Nobel's eastern Mediterranean gas projects at Leviathan and Tamar, which are assets off the coast of Israel. Ditmer told Forbes that, quote, "These are long life fields providing gas to Israel, Egypt and Jordan." He went on to explain that Chevron has wanted to include these types of international gas ventures as crucial parts of his portfolio, which probably will see gas demand supported over the next couple of decades. Is this a sign of more to come? Well, Covid has definitely put a dampner on possible deals with none seen in the oil and gas sector until now since the beginning of the pandemic. But because of the pressure on the industry, the oil giants are also licking their chops, looking for a small potatoes with good assets, for an example, acreage in the Permian Basin that they easily can snatch up. Even better if the small potatoes are struggling a bit. Keep in mind, many shale wells are simply drying up or they're unprofitable, and very few U.S. shale companies can tolerate a lingering oil price drop. According to Energy Job Line, more than 20 North American shale manufacturers have filed for personal bankruptcy this year. So with this 'little' five billion dollar deal, the M&A doors of oil and gas have been shown again. While this deal certainly won't save the sector, don't be surprised if we might see something of a small potato harvest, especially in the US. 

    So much of future planning hinges on to which degree Covid-19 is quelled. Market participants are not just looking at ways to best invest through the Covid wave, they've steadily been shifting their focus to the possible solution. Which company will be the first to market a successful treatment for Covid-19? With scientists working around the clock to try to come up with a vaccine, many are questioning whether the gains seen in pharmaceutical companies will continue, especially given how long the average vaccine usually takes to be developed and taken to market. Take a look at Pfizer, data shows the optimism RMI for Pfizer being considerably higher than pre-Covid levels, despite the stock still being below year highs. The U.S. has now also agreed to pay Pfizer two billion dollars for 100 million doses of vaccine by the end of the year, with the possibility of upping that volume by an additional 500 million, even though there's no approved treatment yet for Covid-19. This is part of the U.S. administration's plan of buying vaccines before they're approved, so that they can be swiftly distributed should a treatment be deemed safe. I spoke to David Craig, the CEO of Refinitiv, and asked him to share his thoughts on what the 'data on the data' of vaccines tells us at the moment. 


    There's really only one game in town right now in terms of return to normality and a revival in the global economy, and that's finding a vaccine for COVID-19. And the kinds of data market professionals are consuming right now, reflects this with an increasing focus on vaccines. And it's really progress in this area, not the progress of the disease itself, that is now capturing the market eye. Hits on news tag disease are down almost 80 percent since the second week of March, but retrievals for news tag vaccines is up over 100 percent. And that's partly an acknowledgment that the disease can't be stopped from going completely global, and neither can it be stopped by all the lockdown's, and is partly a reflection of some really interesting news flow on vaccines recently. We now have about 10 vaccines in human trials, and with some showing some very promising results, and I think there are something like 200 in all that are at some stage of development. And I think in some ways we're heading towards a moment of maybe 'peak hope' right now because we're learning about progress on multiple fronts. And at the same time, we're not yet at a stage where many of these could fall by the wayside. And the reality is that most will, that's just the nature of vaccine development, particularly for a disease as complex as this. I think it was the Wellcome Trust who said that even those vaccines in human trials only have a 10 to 20 percent chance of success individually. So for both governments and private investors, it's a question of which one to back, or ones to back. And for those in the market, it's a question of which one will arrive and when. And our usage data shows that as far as the market's concerned, the field is wide open and we're seeing very high usage of data across a wide range of pharmaceutical companies. 

    So what does this mean for global markets? In the short term I think there's clearly a high correlation in the vaccine news flow and sentiment, and the fortunes of markets. Credit spreads are reducing, home sales in the US are coming back strongly, and the S&P and particularly the Nasdaq continue their march upwards. And there's, it seems, an optimistic buoyancy in the market, perhaps too optimistic, and I think in an extraordinary way, the niche esoteric world of drug trials is playing a pivotal role in that. 

    So as you just heard David mention, there are around 10 vaccines at the moment in human trials. From a science perspective it would be natural to expect the majority of these not to amount to anything. Clinical trials for drugs often have high failure rates. But data shows the more than doubling in 'daily buzz', which is roughly a measure of number of references around biotech companies in particular, with respect to pre-Covid levels. Axios's is Sam Baker and Alison Snyder in their piece 'One Big Thing Vaccine Reality Check', they quote an infectious diseases expert at Johns Hopkins University, Amesh Adalja, who makes the point that; "Right now, we just need something to mitigate the damage that the virus causes."  In other words, even if you get infected, you would avoid hospitalization or dying. The data on the data definitely suggests optimism and interest continuing in pharma and biotech even with the lofty share price gains already seen.