Happy Tuesday!

📝 Focus

• Dynamic Duo: Renminbi and Rupee (CNY & INR)

📊 In the Markets

• China Stamped

• Evertanked

📖 MoneyFitt Explains

🎓 Not crypto: CBDCs

📝 Focus

Dynamic Duo: Renminbi and Rupee

With the BRICS emerging market bloc expanding by six countries, the population covered will rise to 3.58bn, taking it from 42% to 46% of the world, while GDP will increase from 32% to 37% (adjusted for inflation and cost of living.) The largest two countries by both measures will remain China and India. Estimates vary, but for 2023, China's GDP should grow by 4.5% to $19.4 trillion (with risks probably to the downside) compared to India's 7.2% growth to $3.7 trillion. China is the world's second-largest economy, India its fifth, having overtaken the UK last year (the year before pipping China to #1 by population.) BRICS+ is looking to reduce reliance on the US Dollar in a global trend toward "de-dollarisation," and at the summit, Brazil's president Lula pushed for a new BRICS currency, though that's a long shot. (Support was limited, perhaps partly from China's own ambitions for the Yuan.) Surprisingly for casual Western observers, both China and India have advanced digital financial systems.

..... ▷ Like many other countries, China has been taking steps to increase the global use of its currency, the Yuan or renminbi (RMB), as part of its broader economic, financial and geopolitical ambitions. Some of Beijing's goals for the RMB include increasing its use in international trade and investment, promoting its inclusion in global reserve currency baskets, and developing offshore RMB markets. These efforts are aimed at reducing China's reliance on the US dollar and other major currencies and at enhancing the country's influence in the global financial system. Domestically, China has been at the forefront of digital payment technology, with popular platforms such as Alipay and WeChat Pay allowing users to make payments, transfer money and manage their finances using their smartphones. The People's Bank of China is currently testing and developing a digital version of its currency, a central bank digital currency (CBDC), also known as the digital yuan or e-CNY. While it has some potential to challenge the dominance of the US dollar in international trade and finance, strict capital controls limit the ability of individuals and businesses to freely convert the RMB or e-CNY into other currencies, reducing its attractiveness as a global reserve currency.

..... ▷ India's efforts in CBDC development are even further advanced, with the digital rupee pilot from last year potentially fully launched as soon as next year (note that, like the CNY, the INR is also under capital control). The project involves integrating it with the Unified Payments Interface (UPI) system, where merchants can accept digital rupee payments using the same QR code they already have. The UPI payment system allows users to merge multiple bank accounts into a single mobile application, enabling seamless fund routing, merchant payments, and other banking features and is now used by 350mn people (more than the entire population of the USA) with further adoption likely. The UPI system was part of Indian PM Narendra Modi's policies to modernise and reform an archaic and chaotic cash-based financial system rife with fraud, bribery and tax evasion. His abrupt 2016 "demonetisation" move to withdraw high-value notes (₹500 and ₹1,000, then worth about $7.50 and $15) covering 86% of the cash in circulation in a bid to shrink the informal economy and increase its tax take was disruptive but ultimately effective, coming alongside UPI and the development of a voluntary biometric universal digital identity system (Aadhaar) that now covers 99% of India's adults.

..... ▷ The initial reaction from investors, though, was negative. The stock market fell by 6% in the days following the announcement, and foreign investors pulled out billions of dollars from the Indian economy, with fears over the economic impact as businesses and consumers were unable to access cash and about political stability from social unrest or even a political crisis. But investors (not for the first time) were largely wrong: the Indian economy has continued to grow, and foreign investment has returned. The initiatives boosted tax collection (up 19% within two years), direct payments and financial inclusion. As a result of these positive developments, the attitude of international investors towards India has become more positive, recently even more so given the travails of China's increasingly troubled economy.

📊 In the Markets

US and European stocks rose as traders evaluated stimulus actions by Beijing (see below) and awaited US inflation and jobs data. Wall Street closed higher, and 3M surged following reports of a $6bn settlement over failed earplugs for US military personnel. Chinese tech firms like JD.com and Baidu contributed to broad market gains. Europe's Stoxx 600 (not just Eurozone countries) climbed 0.9%, with tech stocks and luxury goods linked to China's consumer spending leading the rise, though trading volumes were light due to the UK bank holiday.

..... ▷ China Stamped: Chinese stocks initially surged on news of Beijing's halving of share trading stamp duty from 0.10% to 0.05% to “invigorate capital markets and boost investor confidence”. The CSI 300 index jumped 5.5% but closed up only 1.2% as gains faded with weak confidence in China's economy unchanged. Over in Hong Kong, the Hang Seng index closed up 1.3%, well off the early gains of over 3%. The last time stamp duties were cut, back in 2008 from 0.30%, the HSI popped 9%. Chinese stocks saw significant net foreign inflows after Beijing promised greater economic support in July, but these have since reversed, with the weekend measures (which include tightening rules on IPOs and on refinancing companies accumulating losses) unlikely to change foreigner pessimism about the broader economic outlook. In fact, foreign investors offloaded a net RMB 8.2bn ($1.1bn) of Chinese stocks via the Stock Connect on Monday, making it 15 out of the last 16 sessions they have been net sellers. Meanwhile, property crisis poster child Evergrande dropped $2.2bn.

..... ▷ Evertanked: Shares in China Evergrande, with total liabilities of more than $300bn, the most indebted property firm in the world, resumed trading on Monday after a 17-month suspension. It promptly tanked after disclosing first-half losses of RMB33bn ($4.5bn) and postponing international creditor talks for another month. The drop represented a $2.2bn or 79% loss of market capitalisation (number of shares X last traded price). At its peak in 2017, Evergrande was worth HK$420bn (US$54bn), and it closed on Monday valued at HK$4.6bn (US$590mn.) The property crisis has significantly impacted China's economy as well as its business, consumer and investor confidence and is adding to the pressure on Beijing to introduce the more substantial, direct stimulus measures that investors had been expecting in July.