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China’s Institute of Financial Research: Facebook’s Libra will have big impact on existing system

supranational currency facebook libra china

Leading Chinese economist Zhu Min has warned that Facebook’s new Libra currency should not be taken lightly. He was talking yesterday at a World Economic Forum event in Dalian China. Min is the Dean of the National Institute of Financial Research and a former Deputy Managing Director at the IMF.

According to Sina Finance, Min said Libra “will have a big impact on the existing financial system, the monetary system and even the future reserve system.”

He also highlighted that Libra is still at a very early stage with many potential problems such as leverage, managing reserves, and a centralized management mechanism.

Additionally, Min contrasted Libra with Alipay. The latter is simply a payment intermediary whereas Libra enables payments, but the core idea is currency backed by a basket of fiat currencies. Secondly Libra, is cross border from the start, whereas AliPay (was initially) focused on the local market. And thirdly, Libra combines policies that a Central Bank might consider as functions of commercial banks.

International transactions

In the past, China has floated the idea of a basket of currencies as an SDR (Special Drawing Rights) to replace the US Dollar. In 2009 the Governor of the People’s Bank of China (PBOC central bank) wrote that role of the dollar as the international reserve currency was causing world financial instability following the 2008 crisis.

Last year the issue was raised again as the trade war started. And two Chinese academics even suggested: “the advent of cryptocurrencies may offer another way: the private sector can work directly with central banks to create a digital SDR to use as a unit of account and store of value.”

They also suggested that “a politically neutral body, owned by the private sector or central banks, should be established to issue the asset.” They went on to consider that China’s Belt and Road Initiative could be conducted in e-SDRs.