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China may be first to ban bitcoin, but they won’t be the last

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A bitcoin sign with a graph pictured in the background.

STR | NurPhoto via Getty Images

I’ve noted in past commentaries that sovereign nations have the power to regulate and eliminate any competitor to their own currencies. One country took that step on Friday.

China’s central bank has just made all cryptocurrency-related activities illegal. The value of bitcoin plunged over 5%, while other digital coins are also trading lower on the day.

What China did may well be repeated in other countries.

Regulators in the U.S. have already expressed some notable disdain for replacing the U.S. dollar, the reserve currency of the world, with any crypto except for a central bank digital currency.

In other words, the only way to replace the dollar is to create a digital version of it, with the support of the Federal Reserve, the U.S. Treasury and Congress.

Securities and Exchange Commission Chairman Gary Gensler who, himself taught a class on cryptocurrencies at MIT, has suggested that decentralized finance and the world in which bitcoin and other cryptos reside, has no rightful place in the U.S. financial system without meaningful oversight and additional regulations.

This may well be a precursor to the U.S. taking steps that render bitcoin, and other cryptos, but not the transformational blockchain technology underlying it, effectively illegal or unusable.

So-called “stablecoins,” backed by interest bearing securities on a dollar-for-dollar basis, may also be at risk since they rely on the U.S. dollar itself for supporting their values and may well be investing in risky securities to deliver a positive yield.

This shot across the bow in China may well just be the first in a series of similar moves around the world.

Crypto bulls have long argued that DeFi, and alternative currencies, are outside the reach of sovereign nations but, as we have seen today, that is far from the truth.

As outright bans and tighter regulations squeeze the value of cryptocurrencies, they also send a message that the fundamental precept on which crypto is based, is flawed, at best.

In a recent talk at a Washington Post event, Gensler pointed to the period in the United States in which individual state-chartered banks issued their own scrip, or currency.

He referred to those days as the “wildcat banking” era. Bank scrip had no intrinsic value except for how individual bank notes were valued against one another, based on perceived safety and soundness.

That experience did not end well and ultimately forced the U.S. to centralize its financial system, led to the creation of a single currency, the U.S. dollar, and, eventually to the creation of the Federal Reserve.

Countries do not, and will not, let their institutions, or their currencies, fall by the wayside because an independent group of currency creators decides it must be so.

The U.S. Constitution grants the power to print and coin money to Congress. Obviously, that power has been challenged several times in our history.

But nations lean toward centralization and control, especially when it comes to money.

China may be the first to ban bitcoin, and other currencies, but I am sure it won’t be the last.

While there are vast differences between the U.S. and China when it comes to revolutionary technological advances, challenging the existing order is not one of those differences.

If it can happen there, it can happen here.

Bitcoin buyer, beware.

—Ron Insana is a CNBC contributor and a senior advisor at Schroders.

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Post-Brexit Britain faces a difficult winter

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Empty shelves that usually stock bottled water at Sainsbury’s supermarket, Greenwich Peninsular, on September 19, 2021 in London, England.

Chris J Ratcliffe | Getty Images

The U.K. has emerged from the Covid-19 pandemic to find itself faced with an onslaught of new economic crises that have left the country in “a precarious position,” experts have warned.

A perfect storm of labor shortages, skyrocketing natural gas prices and global supply chain constraints have put the country in prime position for a difficult winter. Rising demand as economies reopen has created similar problems all over the world, but economists argue that Brexit has exacerbated these issues for Britain.

Labor shortages

A lack of workers is affecting a slew of industries across the country.

Britain has an estimated shortage of 100,000 truck drivers, which haulage organizations have largely attributed to a post-Brexit exodus of EU nationals. The lack of truck drivers has disrupted deliveries, leading to empty store shelves, backlogs at ports and dry gas stations, which sparked a panic buying frenzy in September that lasted weeks.

Other sectors have also warned of deepening labor shortages that are expected to damage the availability and price of goods in the runup to Christmas.

Britain’s National Pig Association has warned that up to 120,000 pigs face being culled within weeks because of a lack of butchers and abattoir workers.

In a statement on Friday, the vice president of the U.K.’s National Union of Farmers said labor shortages across the food supply chain remained acute, while the CEO of the U.K. Warehousing Association said in September that industries including warehousing, engineering and transport were all experiencing severe worker shortages.

At the end of September, the Confederation of British Industry — which represents 190,000 businesses — said its latest data showed 70% of companies were planning pay rises in a bid to tackle labor shortages.

The U.K. government has issued thousands of temporary visas for truck drivers, butchers and agricultural workers, but some critics have argued that this is insufficient to lure foreign workers.

Risk to future growth

Riccardo Crescenzi, a professor of economic geography at the London School of Economics, expressed some skepticism about the solutions being offered by the government.

“Offering three-month [visas] might not work while the rest of the EU is booming because of the injection of resources allowed for its recovery plan,” he told CNBC in a phone call. “And there is not really an unemployment problem in the U.K., so I struggle to see where drivers would come from in the domestic economy.”

Crescenzi said it was hard to know if the issues were temporary. “Some of these shortages could become structural, and this is a problem that can seriously constrain future growth.”

Sam Roscoe, senior associate professor in operations and supply chain management at the University of Sussex, warned that shortages would persist in the U.K. unless there were fundamental changes to the country’s immigration system.

“Brexit was sold as a vote on immigration independence, the U.K. labor market and making sure that everybody in the U.K. had jobs to go to, but the issue is we have 5% unemployment,” he said via telephone. “We’ve lost access to 27 member countries and the labor pool that was once available there, especially in terms of so-called low-skilled labor. I think that definitely puts us in a precarious position.”

Roscoe said it would take years to get enough Brits trained and licensed to drive heavy goods vehicles. “In the meantime, the reality is we’re going to have labor shortages unless the visa rules change.”

Spending power threatened

In a note on Thursday, Credit Suisse economists warned that U.K. consumers “face headwinds in the next few months,” including elevated inflation, supply shortages and the tightening of monetary policy.

“We think real disposable incomes for the U.K. consumer can fall by about 1.5% in 2022, the biggest fall since 2011,” the note’s authors predicted.

Helen Dickinson, head of the British Retail Consortium, told ITV News Thursday that three in five CEOs said they would have to raise prices by the end of the year due to supply chain problems. Some 10% said they had already done so.

Charalambos Pissouros, head of research at JFD Group, said he believed panic buying and supply shortages in the U.K. might also impact spending power by damaging sterling’s value.

“I see the risk surrounding the future of the British pound as tilted to the downside,” he told CNBC. “How severe any further tumble may be depends on how long the situation stays unresolved. Quick responses like the involvement of the British military could restore economic performance sooner than thought and halt sterling’s fall, and this could also allow the Bank of England to proceed freely with its tightening plans.”

Government response to crises ‘alarming’

It comes as Britain also faces an energy crisis. Several U.K. energy suppliers have collapsed since September as wholesale gas prices climbed to record highs. While the problem has affected markets worldwide, the U.K. is particularly vulnerable because of its reliance on gas; more than 22 million households are connected to the British gas grid.

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Mongolia has concerns about Rio Tinto’s management of Oyu Tolgoi

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Mongolia is concerned about Rio Tinto’s management of the Oyu Tolgoi copper and gold mine in the Gobi desert in the southern part of the country, a government official told CNBC.

“We have concerns about the transparency and we also have concerns whether this mine is being operated efficiently,” Solongoo Bayarsaikhan, deputy chief of the Mongolian government’s cabinet secretariat, said Friday on CNBC’s “Squawk Box Asia.”

The open-pit and underground mining project is being jointly developed by the government, which owns about 34% of Oyu Tolgoi, and Rio Tinto’s Canadian subsidiary Turquoise Hill Resources that has a 66% stake in it.

The Anglo-Australian miner owns nearly 51% stake in Turquoise Hill Resources.

What happened?

Oyu Tolgoi’s underground expansion has been hamstrung by delays, development issues and cost overruns for years.

Rio Tinto and Turquoise Hill Resources signed a development and financing plan with Mongolia in 2015 that provided basis for funding the project — but six years on, production has yet to begin in a sustainable way.

Once the underground expansions are completed, Oyu Tolgoi is expected produce more than 500,000 tonnes of copper per year.

Initial projections estimated that the mine would be able to sustainably produce copper from 2021 onwards.

However, last December, Rio Tinto pushed the timeline back and said “sustainable production” was expected to commence in October 2022. The miner also said the underground expansion would cost $6.75 billion, higher than previous estimates.

On Friday, Rio Tinto again delayed that forecast and said sustainable production will happen “no earlier than January 2023.”

The company cited the impact of Covid-19 and outstanding issues around caving operations. It warned that Mongolia’s additional Covid restrictions this year to tackle community transmission is set to add an estimated $140 million to the budget as of the end of September.

While Rio Tinto blamed the delays and rising costs on challenging ground conditions, an independent review this year contradicted that explanation.

Workers walk through a tunnel in the underground mining project at the Oyu Tolgoi copper-gold mine, jointly owned by Rio Tinto Group’s Turquoise Hill Resources unit and state-owned Erdenes Oyu Tolgoi, in Khanbogd, Mongolia, on Sept. 22, 2018

Taylor Weidman | Bloomberg | Getty Images

The Independent Consulting Group’s report, commissioned by Rio Tinto’s partners on the project, concluded that poor management was the main reason the mine’s underground expansion was running almost two years late and $1.45 billion over budget, the Financial Times reported.

Mongolia reacts

Rio Tinto reportedly challenged the findings of the report in a letter to Mongolia’s justice minister and said the review did not fully recognize the full impact of weaker-than-expected conditions that forced the mine to be redesigned.

“We asked Rio Tinto to explain the discrepancies between the independent review report and Rio Tinto’s position,” Bayarsaikhan told CNBC on Friday.

“We didn’t find the letter satisfactory, in terms of responding to our specific queries and specific concerns over why there is a cost overrun and scheduled delays, why there’s very different conclusions in the independent review report,” she said. “Rio Tinto didn’t provide sufficient responses.”

Bayarsaikhan explained that the Mongolian government wants to find a “mutually beneficial solution” and avoid further surprises in terms of further cost increase and delays.

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Defaults risks for other developers, PBOC on Evergrande

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Aerial photography of “river view house” on the side of the Yangtze River. Yichang, Hubei Province, Oct. 16, 2020.

Costfot | Barcroft Media | Getty Images

The fallout in China’s property sector is showing no signs of abating, as more developers face the threat of default — even as uncertainty over the fate of heavily indebted Evergrande looms.

All eyes will be on Chinese real estate developer Sinic Holdings, which warned last week that it’s not likely to repay offshore bonds worth $250 million due on Monday. There was still no word from the developer as of noon. CNBC has reached out to the company.

On Friday, another developer, China Properties Group, said it had defaulted on $226 million worth of notes, as it had failed to secure funds by the Oct. 15 maturity date.

They were not the first — Fantasia Holdings had failed to make a bond payment worth $206 million in early October.

Last week, ratings agencies issued a fresh round of downgrades for Chinese real estate companies.

This week, Evergrande will officially be in default if it doesn’t pay up for interest to a U.S.-dollar denominated offshore bond – the payment was due in late September but has a 30-day grace period. The company has kept silent on coupon payments for four other bonds that were due in the past few weeks.

These developments come as China’s central bank said Friday that the risks posed by Evergrande are “controllable,” and that most real estate businesses in the country are stable.

However, the People’s Bank of China also said property firms that have issued bonds overseas — referred to as offshore bonds — should actively fulfil their debt repayment obligations.

On Sunday, the central bank’s Governor Yi Gang made additional comments. He said authorities will try to prevent Evergrande’s problems from spreading to other real estate firms, according to Reuters.

He also said China’s economy was “doing well,” but faced challenges such as default risks from “mismanagement” at certain firms, the news agency reported.

Real estate and related industries account for about a quarter of China’s GDP, according to Moody’s estimates.

Read more about China from CNBC Pro

China’s property developers have grown rapidly following years of excessive debt, prompting authorities to roll out the “three red lines” policy last year. That policy places a limit on debt in relation to a firm’s cash flows, assets and capital levels.

Things came to a head after the policy started to rein in developers. The world’s most indebted developer, Evergrande, warned twice last month it could default. 

It has since missed three interest payments for its U.S.-dollar bonds. The stock has been suspended since Oct. 4, and ratings agencies have downgraded other real estate firms on concerns about their cash flows.

Trading of Chinese real estate bonds spiked to over $1 billion so far in October, from over $600 million in August, according to data from electronic fixed income trading platform MarketAxess. Evergrande’s 8.75% bond maturing in 2025 is currently the second-highest most traded emerging market bond on its platform, it said.

More ratings downgrades

There was a new round of downgrades at other Chinese real estate firms last week.

CNBC has reached out for comment from each of the firms but has yet to hear back.

1. China Aoyuan
On Friday evening, S&P Global Ratings downgraded
China Aoyuan, one of the bigger developers in China’s Guangdong province which focuses on the country’s Greater Bay area. The ratings agency pointed to its high debt, and said the firm’s move to reduce debt will slow over the next year.

It also flagged Aoyuan’s “considerable” bond maturities due in 2022, which will put further pressure on the property firm.

One thing we can be sure of is that the property sector is struggling.

Julian Evans-Pritchard

senior China economist, Capital Economics

“The company’s reduced visibility on revenue growth and continued margin pressure will hinder deleveraging efforts. Weakening cash generation will also pressure Aoyuan’s liquidity as it faces sizable maturities in 2022, despite our expectation that the company can still sort out the repayment under a tighter situation,” S&P said.

2. Modern Land
Fitch also downgraded Modern Land on Friday, citing the developer’s move to delay for three months a repayment on a $250 million offshore bond.

3. Greenland Holding
Preceding Friday’s downgrades, S&P on Thursday downgraded Greenland Holding — one of the bigger real estate developers which has prestigious properties in cities such as New York, London and Sydney. It also cited its “impaired” funding access, which will limit its ability to weather the downturn in the property industry. Fitch said it expects the firm’s ability to generate cash to slow.

“Greenland’s bond prices have deteriorated sharply again following wider investor concerns over the sector,” Fitch wrote. “A prolonged weakness in bond prices may hit the confidence of the company’s borrowers, suppliers, and purchasers.”

China properties ‘struggling’: Capital Economics

New home sales have dived in recent weeks and are now 25% below 2019 levels, said research firm Capital Economics in a note on Friday.

“The Evergrande debacle has probably given homebuyers concerns about whether developers will honour presale commitments,” Capital Economics’ Senior China Economist Julian Evans-Pritchard said.

Meanwhile, developers’ land purchases have slumped as they “batten down the hatches” to ride out slowing sales and the constraints on their financing, the economist added. That points to a further pullback in new housing projects in the coming months.

“One thing we can be sure of is that the property sector is struggling,” he wrote.

Looking ahead, he expects more policy easing of the property sector, as authorities look to boost housing demand. This may include cutting minimum down-payment requirements for first-time home buyers, and rate cuts to push down mortgage costs, Evans-Pritchard wrote.

“We do not expect policymakers to relax constraints on developer financing or allow a sharp pick-up in overall credit growth,” he said. “The leadership, we think, remains committed to lowering developer leverage.”

— CNBC’s Evelyn Cheng contributed to this report.

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