1 yuan for 1 million! A "millionaire" becomes a pauper overnight? This country is in a hurry to reform its currency and launch digital currency

Will Venezuela's "millionaires" become paupers in an instant?

Recently, Venezuela announced a new round of currency reforms, and will issue new currency for circulation starting October 1 this year, with a 1:1 million exchange rate with the current sovereign currency Bolivar. At the same time, the country's central bank said that the digital currency corresponding to the new currency will be circulated simultaneously.

Five years ago, India also suddenly launched a controversial currency reform policy, but the operation mode and purpose were quite different from those in Venezuela. In a short period of time, two large-denomination banknotes in India became "waste paper" and were replaced by newly issued banknotes. However, as soon as the "banknote demonetization order" was issued, the Indian stock market plummeted, the highway was paralyzed due to traffic strikes, and people lined up in long queues to exchange banknotes, and the scene was once chaotic.

In addition, under inflationary pressure, central banks of many countries are also implementing a new round of monetary policies to cope with the situation.

1 million will soon depreciate to 1 yuan

According to Xinhua News Agency, the Central Bank of Venezuela recently announced that it will issue and circulate a new version of the currency starting October 1 this year. The exchange rate with the current sovereign bolivar in circulation in the country will be 1:1 million, which means that six "0s" will be deleted from the existing currency denomination.

It is understood that the coin value of the new currency is 1 Bolivar, and the banknotes have denominations of 5, 10, 20, 50 and 100 Bolivars respectively.

According to the official exchange rate on the Venezuelan Central Bank website, 1 US dollar can be exchanged for about 4.068 million sovereign bolivars. The largest denomination of the country's sovereign bolivar is 1 million, which was issued in March this year.

Due to factors such as the international political environment, oil price fluctuations and domestic instability, Venezuela's inflation and currency depreciation have long been a cause for concern. In recent years, the Venezuelan government has launched rounds of currency reform plans in an attempt to break through the difficulties, including issuing new versions of currency, large-denomination banknotes and digital currencies.

For example, in 2008, the country proposed to add the prefix "strong" to the name of the currency, and at the same time as changing the name of the currency, the currency denomination directly deleted three "0". However, the situation did not improve, and Venezuela's inflation and devaluation continued, and the authorities had to coordinate a new currency plan, which cut the currency by another five "0" in 2018.

In the latest currency plan proposed by the country's central bank a few days ago, the new currency expression will delete 6 "0"s of the currency, so that all numbers represented in the currency will be divided by one million.

This also reminds people of India, which once launched currency reform. Five years ago, India also experienced the situation where large-denomination banknotes became waste paper overnight.

On November 8, 2016, Indian Prime Minister Narendra Modi suddenly announced that the old 1,000 and 500 rupee notes would be discontinued from the early hours of that day, and new 500 and 2,000 rupee notes would be issued to combat corruption, tax evasion and currency counterfeiting. After a short transition period, the two notes became worthless after December 30 of the same year.

At that time, India's "demonetization order" shocked the world. This was the first time in nearly 40 years that India abolished paper money in circulation. As soon as the "demonetization order" came out, the Indian stock market plummeted, highways were blocked and paralyzed due to traffic strikes, and people lined up in long queues to exchange banknotes, and the scene was once chaotic.

The groups most affected by India's currency reform are the rich who evade taxes, corrupt officials who hide large amounts of cash, and groups that illegally counterfeit currency. The "demonetization order" forces Indians to deposit cash in banks, reducing the flow of money outside the national regulatory system, reversing the previous over-reliance on cash, and thus advancing the process of currency digitization and systematization.

Digital currency will be launched at the same time

In addition, the Venezuelan central bank also stated in the above statement that the digital currency corresponding to the new version of the currency will be circulated simultaneously, which will help promote the development of the country's digital economy and facilitate online payments for the public. "The introduction of the digital Bolivar will not affect the value of the currency, that is, the value of the currency will not increase or decrease. This is done to facilitate its use." The Venezuelan central bank also stated that at the same time, citizens can continue to use paper money.

The country's central bank believes that the digital bolivar will help reduce transaction costs in the economy to facilitate daily transactions. In addition, it can speed up transaction and accounting procedures and advance the vision of building a modern currency in daily transactions.

"This decision will also ensure Venezuela's sovereignty in order to promote economic recovery in our country's complex monetary situation," the central bank said in a statement, adding that the country's national economy has been hit by a series of economic attacks and financial blockades (referring to the economic sanctions imposed on the country by the US government).

It is understood that recently, Calixto Ortega Sánchez, the president of the Central Bank of Venezuela, held a meeting with the Institute's board of directors, and officials from the country's banking agency supervision agency and banking association also attended. After the meeting, the country's public and private banking sectors said they would continue to adjust their technical systems and platforms in accordance with the new currency performance.

Earlier, Venezuela had issued another digital currency, the Petro, which was backed by the country's oil and gold in an attempt to break the US economic blockade and improve the country's economic situation. However, due to the severe shortage of the real economy and the obstruction of international transactions, the issuance of this digital currency has not been able to reverse Venezuela's inflation trend.

Many countries are facing expectations of interest rate hikes

Under the pressure of inflation, many central banks are also implementing a new round of monetary policies to cope with the situation. The Brazilian Central Bank recently announced that it would adjust the benchmark interest rate by a full percentage point to 5.25%, which is also the largest interest rate hike implemented by Brazil since 2003.

The Brazilian central bank also said that it expects to raise interest rates again in September by the same amount, and the market believes that the country's inflation will remain above the target level until 2022. In fact, since March this year, the Brazilian central bank has raised interest rates by 325 basis points, making it one of the most aggressive central banks in the world to start tightening measures.

However, Brazil’s inflation remains above target, driven by food and electricity prices, and price pressures are building as some regions lift recent pandemic restrictions, forcing policymakers to do more to meet their inflation target next year.

Adriana Dupita, a Latin America economist, said the hawkish message could lead to a steeper yield curve than it is now, adding a significant upward bias to the 6.5% benchmark rate forecast for the end of this year. "In Brazil, the drivers of inflation include the impact of the climate crisis on food and drought," said Alejandro Cuadrado, a Latin America strategist.

In fact, Brazil is not the only country facing the difficult inflation dilemma. Amid the fluctuations in the global capital market, many countries have adopted the measure of raising interest rates to cope with inflation since the first half of this year.

In March this year alone, three central banks announced interest rate hikes in succession:

On March 17, the Central Bank of Brazil announced a 75 basis point increase in the Selic target rate to 2.75%, the first rate hike in Brazil since July 2015.

On March 18, the Central Bank of Türkiye announced a 200 basis point increase in the key interest rate to 19%.

On March 19, Russian Central Bank Governor Elvira Nabiullina announced that the key interest rate would be raised to 4.5%.

"If inflation continues to rise, other central banks will follow suit and raise interest rates." Some analysts said that under the trend of globalization, the depreciation of the US dollar has far-reaching impacts. However, my country has not implemented the monetization of fiscal deficits. "The RMB exchange rate is stable, the economy is recovering beyond expectations, and inflationary pressure is not great." He said.

Some market participants also pointed out that since last year, the United States has implemented multiple rounds of quantitative easing, accelerated the issuance of treasury bonds, and injected a huge amount of base currency. At present, the impact of global monetary easing has begun to emerge. "Due to the flood of US dollar liquidity, the US stock market has repeatedly hit new highs. At the same time, rising prices have had an adverse impact on the economy, and the continuous surge in commodity prices means that the manufacturing costs of various countries are also increasing."

Judging from the recent statements of the Bank of England, its monetary policy may also change from dovish to hawkish, and its assessment of the peak inflation is much higher than the 3% forecast in May. This stance also seems to be consistent with the hawkish shift of global central banks. For example, in late July this year, the Reserve Bank of New Zealand announced the end of quantitative easing policy, and the market expects that its interest rate hike will be brought forward by one year to November this year.

In addition, Federal Reserve Vice Chairman Richard Clarida also said recently that the central bank is expected to withdraw the huge support it has provided to the economy due to the epidemic in an orderly manner, starting with announcing a reduction in bond purchases later this year. "The necessary conditions for raising the target range for the federal funds rate will be met by the end of 2022," he said in a public speech.