HONG KONG, CHINA - 2020/10/14: Screens at a department store are seen showing a news broadcast of ... [+]
Shenzhen has always been a pioneering city for the People’s Republic of China. In May 1980, then-paramount leader of the PRC, Deng Xiaoping elevated it into a “special economic zone”, a first in market capitalism in a country where GDP per capita hovered around $175, and which was only a few years removed from Maoist economics. Shenzhen would become known as the emerging point of the “opening and reform” period of Chinese history that would slowly build towards China becoming the second largest economy in the world.
The city has since grown into a tech hub, synonymous of smart hardware and technological innovation within the People’s Republic of China, as a hub where foreigners and domestic companies come together to quickly innovate and build on hardware. It holds the headquarters for Huawei and Tencent (creators of Weixin and its ubiquitous international equivalent WeChat) and is frequently called “China’s Silicon Valley”.
It is no coincidence that the Chinese state has become most aggressive at trialing its digital yuan in Shenzhen, giving out free amounts of about 10 million yuan (about $1.5 million in USD) to about 50,000 citizens selected by a lottery in the form of “red envelopes” or 红包 (hóngbāo), a monetary gift traditionally wrapped into red envelopes for special occasions such as Chinese New Year, or weddings.
Each recipient got about 200 digital yuans (about $30 USD) that they could spend in about 3,000 retail outlets. Almost 2 million people signed up for the lottery according to the local government. In many ways, this whole endeavor was like a state-sponsored airdrop, rather than a methodical trial.
Coincidentally (or not), the unveiling of the digital yuan’s lottery and Xi’s speech in Shenzhen coincided roughly with the news that the founder of a major cryptocurrency exchange (OKEx) was being held in custody by Chinese police — briefly affecting worldwide cryptocurrency prices as withdrawals from OKEx were suspended.
The digital yuan itself is not a cryptocurrency, but rather a digital variant of the yuan that is pegged 1:1 by it, along with a variety of tools that are controlled and maintained by the Chinese state. It represents perhaps the most aggressive economic consolidation and centralization in the 21st century rather than the values of self-custody and financial independence and decentralization that drive cryptocurrencies.
Lately, Shenzhen has been elevated again by the Chinese state in addition to the trials with the digital yuan, in a way that shows how the Chinese state is converging towards focusing and prioritizing domestic innovations that can become international standards. On the 40th anniversary of Shenzhen’s designation as a special economic zone, Xi Jinping gave a speech about the need for domestic innovation. During the speech, he highlighted that “[The People’s Republic of China] must take the road toward a higher level of self-reliance.” This comes at a critical moment — China is set to unveil its 14th “five-year plan” with Chinese state media acknowledging that reform has entered a “critical period”.
The undertone was a marked rise in hostility around the world to the globalized trade mechanisms that have allowed the PRC to grow, and a chilling around the world in response to the emergence and spread of COVID-19. Xi’s speech was colored with references to resilience and continuing strongly on the same path regardless of external pressures.
According to a recent Pew study, negative opinion of China has reached an all-time high since Pew started doing this survey in nine countries including the United States. A median across countries surveyed showed that 78% of people didn’t trust Xi to do the right thing in world affairs — and more than 7/10ths of people in all countries surveyed said the same.
Another point of emphasis in the speech, which was highlighted by Chinese state media: the need for Shenzhen to act as a model for a “correct” implementation of the “one country, two systems” principle amid a consolidation of the “Greater Bay Area” — the unifying political banner for a consolidation of Guangzhou, Shenzhen, Hong Kong and Macau. Xi called on Shenzhen to be the “engine” of the greater region, shifting away from financial ties and trade flows to the rest of the world towards emerging technology standards.
With protests brewing in Hong Kong (one of the only areas where you could still deal in cryptocurrency that was subject to some degree of Chinese state intervention) and the implications of a harsh new security law still playing out in a city that was nominally committed to the balance of power, the implication of centralization and a shift in priorities could not be clearer — especially when Xi referred to the need to bind Hong Kong’s youth to feel closer to the mainland through the elevation of Shenzhen as a new model for the PRC’s version of socialism.
The reference to “one country, two systems” made it clear that Shenzhen has become a political as well as economic priority. After all, “one country, two systems” is in contention in Hong Kong, and it is the framework being developed to try to bring Taiwan into the PRC’s orbit. These are two of Xi’s highest near-term and medium-term priorities, if not the top ones outright.
With this political consolidation comes the aggressive economic consolidation of digitizing currency and being able to reward or punish individual citizens — and track their every financial flow. Shenzhen is being aggressively pushed forward as China’s model for its future, in sharp contrast perhaps to Hong Kong — a future that will include a central focus on emerging technology standards such as the digital yuan being piloted in Shenzhen now.
Great powers that consider China a strategic rival such as the United States and European Union, and cryptocurrency holders and adherents dedicated to individual privacy, economic liberty and self-custody must make sure to consider their positions with regards to the new digital yuan, as it clearly establishes itself as a central focus of the Chinese state.
