China’s Yuan Devaluation: The Aftermath [Chart]
Oil and copper get decimated; Euro an unlikely winner
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
Sometimes it feels like the market is one giant ant farm. Investors and traders build all of their little tunnels, and then all of a sudden someone shakes the ant farm causing impending chaos for the hapless ant denizens.
In this case, it was the People’s Bank of China (PBOC) that shook the ant farm – and they did it multiple times this week.
It all started early Tuesday morning as China moved the midpoint of the yuan’s peg by 1.9%, the biggest move since 1994. The PBOC called this change a “one-time adjustment” and said its fixing will now become more aligned with supply and demand. They then proceeded to devalue the yuan two other times throughout the week for a combined 4.4% decrease in value. The Chinese central bank now claims that the yuan will move more according to market forces, which is necessary to get included into the International Monetary Fund’s basket of currency known as Special Drawing Rights (SDR).
We most recently warned about the inevitability of such central bank moves about a month ago, when the Bank of Canada decreased its benchmark rate for the second time in six months. However, it wasn’t until these moves by the PBOC that the market really felt uneasy, and the term “currency war” entered back into the public vernacular.
Investors are clearly shaken up, as all sorts of trading went haywire in the aftermath of the yuan devaluation. Some currencies, like the Canadian dollar, tanked early and then bounced back to take some gains against the USD. The euro fell initially and then bounced back in a big way, gaining 1.8% in the week’s trading. It’s now trading at eight-week highs.
Countries that are inextricably linked to China by regional trade, such as Singapore, Australia, and New Zealand, all had their currencies fall as well. Some emerging markets were also affected strongly, with the Indian rupee dropping -2.3% through the course of the week against the USD.
However, the biggest impact was to commodity prices. A lower yuan means imports are more costly and creates incentive to buy from domestic Chinese producers of base metals and energy. The devaluation was also interpreted by traders as an admission by the Chinese government that the economy is weak, and this helped copper and oil (WTI) tumble. Copper is at its lowest price ($2.35/lb) since the tail-end of the Financial Crisis, and WTI oil continued its worst summer in trading history to end up in a similar position at $42.35/bbl.
Gold is up on the week by about 1%, but it is also bouncing off of its lowest price since 2010.
Decentralized Finance: An Emerging Alternative to the Global Financial System
What is decentralized finance? Learn how technology is changing the rules of the game, creating the potential for a new financial system to emerge.
Decentralized Finance: An Emerging Alternative
The global financial system has created massive wealth, but its centralized nature means the spoils have gone to the people who are best connected to the financial centers of the world.
As global inequality continues to rise, how can wealth building tools become more accessible to the rest of the global population?
Luckily, technological developments and their rapid adoption make this the right time for a new decentralized financial system to emerge:
- The Internet: 3.9 billion users by the end of 2018
- The proliferation of smartphones: Two-thirds of the unbanked have mobile phones
- Digital banking: over 2 billion users by end of 2018
- Bitcoin and Blockchain: the emergence of new public blockchains
Today’s infographic comes to us from investment app Abra, and it highlights how public blockchains could help to enable a decentralized finance system.
What is Decentralized Finance?
Decentralized finance describes a new decentralized financial system that is built on public blockchains like Bitcoin and Ethereum. After all, Bitcoin and Ethereum aren’t just digital currencies — they’re foundational open source networks that could be used to change how the global economy works.
There are six primary features that differentiate public blockchains from the private networks used by governments and traditional financial institutions:
- Permissionless: Anyone in the world can connect to the network
- Decentralized: Records are kept simultaneously across thousands of computers
- Trustless: A central party isn’t required to ensure transactions are valid
- Transparent: All transactions are publicly auditable
- Censorship Resistant: A central party cannot invalidate user transactions
- Programmable: Developers can program business logic into low-cost financial services
In such a financial system, users will have access to apps that use public blockchains to participate in new open global markets – but how would this shape the global financial system for the better?
The Potential Impact of Decentralized Finance
Here are five ways that decentralized finance will have an impact on the world:
1. Wider Global Access to Financial Services
With decentralized finance, anyone with an internet connection and a smartphone could access financial services. There are a variety of barriers that prevent access in the current system:
- Status: Lack of citizenship, documentation, credentials, etc.
- Wealth: High entry-level funds required to access financial services
- Location: Vast distance from functioning economies and financial service providers
In a decentralized financial system, a top trader at a financial firm would have the same level of access as a farmer in a remote region of India.
2. Affordable Cross-Border Payments
Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population.
In the current system, it’s prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees could be below 3%.
3. Improved Privacy and Security
In decentralized finance, users have custody of their wealth and can transact securely without validation from a central party. Meanwhile, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it.
4. Censorship-Resistant Transactions
In a decentralized financial system, transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations.
In places with poor governance and authoritarianism, users can divest to the decentralized financial system to protect their wealth. For example, Venezuelans are already adopting Bitcoin to protect their wealth from government manipulation and hyperinflation.
5. Simple Use
Plug and play apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system.
With a decentralized system, a woman in the Philippines could receive a loan from the U.S., invest in a business in Colombia, and then pay off her debt and purchase a home – all through interoperable apps.
The Potential Blue Sky
Unless governments and central banks suddenly cease to exist, it’s difficult to imagine a world where decentralized finance completely replaces their centralized counterparts.
But what if they can co-exist?
Public blockchains can interact with the traditional financial system to create a new hybrid model:
- Users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system.
- Users could hedge against systemic risk by diversifying their wealth holdings in both the central and decentralized system.
Like the internet with knowledge, decentralized finance could help democratize the financial system.
But will we allow it?
The 7 Major Flaws of the Global Financial System
Since the invention of banking, the global financial system has increasingly become more centralized. Here are the big flaws it has, as a result.
The 7 Major Flaws of the Global Financial System
Since the invention of banking, the global financial system has become increasingly centralized.
In the modern system, central banks now control everything from interest rates to the issuance of currency, while government regulators, corporations, and intergovernmental organizations wield unparalleled influence at the top of this crucial food chain.
There is no doubt that this centralization has led to the creation of massive amounts of wealth, especially to those properly connected to the financial system. However, the same centralization has also arguably contributed to many global challenges and risks we face today.
Flaws of the Global Financial System
Today’s infographic comes to us from investment app Abra, and it highlights the seven major flaws of the global financial system, ranging from the lack of basic access to financial services to growing inequality.
1. Billions of people globally remain unbanked
To participate in the global financial sector, whether it is to make a digital payment or manage one’s wealth, one must have access to a bank account. However, 1.7 billion adults worldwide remain unbanked, having zero access to an account with a financial institution or a mobile money provider.
2. Global financial literacy remains low
For people to successfully use financial services and markets, they must have some degree of financial literacy. According to a recent global survey, just 1-in-3 people show an understanding of basic financial concepts, with most of these people living in high income economies.
Without an understanding of key concepts in finance, it makes it difficult for the majority of the population to make the right decisions – and to build wealth.
3. High intermediary costs and slow transactions
Once a person has access to financial services, sending and storing money should be inexpensive and fast.
However, just the opposite is true. Around the globe, the average cost of a remittance is 7.01% in fees per transaction – and when using banks, that rises to 10.53%. Even worse, these transactions can take days at a time, which seems quite unnecessary in today’s digital era.
4. Low trust in financial institutions and governments
The financial sector is the least trusted business sector globally, with only a 57% level of trust according to Edelman. Meanwhile, trust in governments is even lower, with only 40% trusting the U.S. government, and the global country average sitting at 47%.
5. Rising global inequality
In a centralized system, financial markets tend to be dominated by those who are best connected to them.
These are people who have:
- Access to many financial opportunities and asset classes
- Capital to deploy
- Informational advantages
- Access to financial expertise
In fact, according to recent data on global wealth concentration, the top 1% own 47% of all household wealth, while the top 10% hold roughly 85%.
On the other end of the spectrum, the vast majority of people have little to no financial assets to even start building wealth. Not only are many people living paycheck to paycheck – but they also don’t have access to assets that can create wealth, like stocks, bonds, mutual funds, or ETFs.
6. Currency manipulation and censorship
In a centralized system, countries have the power to manipulate and devalue fiat currencies, and this can have a devastating effect on markets and the lives of citizens.
In Venezuela, for example, the government has continually devalued its currency, creating runaway hyperinflation as a result. The last major currency manipulation in 2018 increased the price of a cup of coffee by over 772,400% in six months.
Further, centralized power also gives governments and financial institutions the ability to financially censor citizens, by taking actions such as freezing accounts, denying access to payment systems, removing funds from accounts, and denying the retrieval of funds during bank runs.
7. The build-up of systemic risk
Finally, centralization creates one final and important drawback.
With financial power concentrated with just a select few institutions, such as central banks and “too big too fail” companies, it means that one abject failure can decimate an entire system.
This happened in 2008 as U.S. subprime mortgages turned out to be an Achilles Heel for bank balance sheets, creating a ripple effect throughout the globe. Centralization means all eggs in one basket – and if that basket breaks it can possibly lead to the destruction of wealth on a large scale.
The Future of the Global Financial System?
The risks and drawbacks of centralization to the global financial system are well known, however there has never been much of a real alternative – until now.
With the proliferation of mobile phones and internet access, as well as the development of decentralization technologies like the blockchain, it may be possible to build an entirely new financial system.
But is the world ready?
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