The new financial environment represented by the planned digital currency Libra promises to optimize resource allocation, improve the efficiency of financial services, and spread the benefits of financial services development to more people. Yet as privately developed financial information technologies, these "destructive" and "alternative" new technologies pose significant changes to financial consumption, financing and payment channels, and pose challenges to China's monetary policy and to prudential supervision by financial authorities.
Impact on China’s central bank’s intermediate money policy indicators
1.1 The impact on money supply
Digital currency would tend to substitute for cash, reducing cash in circulation and change the basic monetary structure. Further, the monetary transformation effect would change the total amount of money supply through the monetary multiplier effect, making it more difficult for the central bank to control the total amount of money. For similar reasons, the boundary between different types of money supply would become less clear. These changes to the basic monetary structure would add to interference factors faced by the central bank when it seeks to implement policy by adjusting money supply and could lead to large deviations in the effectiveness of monetary policy implementation. Under, the operation mechanism of a Libra-type digital currency, the role of money supply as an intermediary policy indicator could be weakened.
1.2 The impact on the monetary base
Libra may reduce the amount of cash in circulation and increase the amount of reserve requirements. However, how base money changes in general depends on the replacement of cash in circulation, the increase of deposits and upon the level of statutory reserve requirements. The issuance of Libra would enable more money in resident accounts to be stored in electronic form. Chinese residents are likely to keep more money in banks and electronic accounts, reducing cash in circulation, and correspondingly increasing the amount of required reserve deposits. As residents become more willing to arbitrarily withdraw money, banks need to allocate more currency reserves. Further, if Libra is widely used then it would also be used in financial product transactions, as well as in credit sales, trade finance, consumer credit and so forth, with implications that need to be considered.
1.3 Effects on the velocity of money
Velocity of money refers to the number of times money is circulated in a given period of time. If the digital currency system represented by Libra is more convenient and practical than the traditional electronic payment system, the velocity of currency circulation might accelerate under the Libra payment system.
The impact on China's conventional interest rate policy
If Libra is issued and used by some users, it might lead to the instability of the money supply, the effectiveness of quantitative monetary policy may be lower than that of price monetary policy, and the importance of interest rate regulation in monetary policy would be further highlighted. Therefore, the uncertainty of the relationship between the supply and demand of currency quantity will increase, the difficulty of interest rate adjustment along the interest rate corridor mechanism and the difficulty of independent and effective pricing by banks would increase.
Since the interest rate of Libra is determined by the interest rate of its pledged assets, it would not be subject to China's interest rate policy, which means that it could weaken the effectiveness of China's interest rate policy. Further, when the specific interest rate policy orientation leads to a large deviation between market interest rates, sovereign credit currency rates and Libra assets, it could also cause a large fluctuation in demand for domestic RMB domestic. This could have broadly negative effects the implementation of national macroeconomic regulation and control and on financial industry policy supervision.
The impact on the transmission mechanism of China's monetary policy
In the financial ecosystem which may emerge alongside Libra, the breadth of the financial markets (such as cross-border payment transaction) and depth (variety, the degree of active trading, financial instruments arbitrage mechanism) are likely to be further improved, and the degree of marketisation may also increase. Financial institutions, and enterprises, residents and other non-financial sector may respond positively to these market signals. If the monetary authorities fail to include Libra into the regulatory scope in time and take corresponding measures, then monetary authorities may not be able to take appropriate measures to guide the response from financial and non-financial institutions and the monetary policy transmission process and monetary policy implementation may be weakened.
The impact on China's foreign exchange management policy
