I have not kept it a secret that I am against CBDCs in all its shape and forms. Almost all the reasons given for why a country “needs” a CBDC ring more hollow than Son Doong, the world’s biggest cave. But as I have looked into China I have found what I believe is their biggest reason for wanting a CBDC, and it is a reason I have not seen anywhere.
The average Chinees citizen tends to invest their money in real estate. This is done to the extent that real estate in China is viewed first and foremost as a speculative commodity, and secondly as a place to live. And as for the reason why real estate is so popular, well historically investment in Chinees companies has not been that great. But the value of real estate on the other hand has mooned over the years. China’s economy doubles every eight years this is easy to see how owning real estate becomes very attractive.
This is coupled with the fact that basically any other form of investment that takes control away from the Chinees part and the banks quickly gets banned. Most recently the ban on crypto.
If we now look at China the country, they are currently the second-largest economy. Even if the GDP numbers most likely are inflated. Being the second-largest economy is still very impressive. And they are able to raise tax revenue of just over 9% of their GDP. But if we compare this with the US, their numbers are 17% of GDP, and around 25% if you include local and state revenues. But how come these two numbers are almost 3 times as big in the US compared to China?
The biggest issue is that most citizens in China work in what is known as an informal economy. More or less a cash business. This means there is little to no incentive for them to pay taxes, so they don’t. The rich people, well just like everywhere else have enough money to avoid paying taxes. This leaves a staggeringly low number of the population that actually pays tax. Only about 20% of the population in China pays taxes.
Companies are more or less allowed to dodge taxes. This is done because if the government wants to crack down on the company, they are more or less guaranteed to find reasons because of this lax tax policy.
If this is the case where are they getting the money then? It has to come from somewhere. The local governments have to pay 60% of all revenues to the state, but any revenue made from land leases they are able to keep for themselves. And because no citizen or company is allowed to own land in China, leasing it is the only option left.
With citizens more or less only investing in real estate, and the local government getting the majority of its funding from land leases. What happens when you pop the real estate bubble? How will the local government governments now then get their funding to keep the lights on, collect trash and keep the hospitals running? If the real estate bubble bursts there is more or less no demand for new land to develop.
This is what I see as the main reason China wants to adopt a CBDC. That would effectively allow them to eliminate the informal “cash-only” economy. And it would allow them to collect taxes from a much larger part of their population. Do this mean they will stop leasing land, well obviously not. But this would mean they no longer would need the land leases to fund everything.
The fact that the real estate bubble is slowly collapsing currently has only added fuel to the fire under the government. As they now more than ever see how vulnerable their economy is. As it is more than just the companies and citizens of China that is depending on the real estate sector. It is the government itself that more or less depends on it for its day-to-day expenses, and to keep everything running.
This is why I think this is the main reason why China is pushing for a CBDC. They simply see it as a necessary thing and a must, if they are to be able to keep growing in a somewhat similar fashion as before.
What is your thought on this, am I reading too much into this? Or is this one of the, if not the main reason for them to get a CBDC up and running as fast as possible? Please share your thought on this and on China and their CBDC in general in the comment section down below. If you would like to support me and the content I make, please consider following me, reading my other posts, or why not do both instead.
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Picture provided by: Fair Use