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.
