What Other Countries Will Learn from Chinese Crackdown on Cryptos

The Chinese government has been cracking down on bitcoin and other cryptocurrencies. This, along with a few other reasons, has led to cryptocurrencies crashing from their all-time high levels over the last few months.

The question is why is the Chinese government doing this? The simplest answer lies in the fact, and as I have explained on multiple occasions before, up until cryptocurrencies came along, the right to create money out of thin air was only with the governments.

Cryptocurrencies challenge that hegemony, and which has been their basic selling point over the years. The trouble is that the right to create money out of thin air is something any government isn’t going to give up on easily. The history of money tells us that while different forms of money emerge privately, it is the government which usually controls the monetary system.

This is a point that the economist John Maynard Keynes made in A Treatise on Money, in which he said that all modern states have had the right to decide what is money and what is not, and they have had it “for some four thousand years at least”. This is a point most crypto bulls don’t seem to get.

Another reason offered behind the Chinese crypto crackdown is that bitcoin and other cryptocurrencies are coal intensive. This is something that entrepreneur Elon Musk also said when he tweeted on bitcoin around a month back.

Now what does this mean?

Over the years, it has become more and more difficult to mine bitcoin. These days bitcoin farms with giant racks of mining computers are needed to mine bitcoins.

As Jacob Goldstein writes in Money – The True Story of a Made-Up Thing:

“People started building special computers optimized to mine bitcoin… Then they started filling giant warehouses full of racks of those mining computers. The computers sucked up so much energy that miners began seeking out places in the world where power was cheap, to lower their costs of mining. Vast mining operations sprung up in Iceland, Mongolia, and, especially, China.”

The point being bitcoin mining ends up using a lot of electricity. And most of this electricity is generated through fossil fuels. 36% of the electricity worldwide is generated through the use of coal and 23% through the use of natural gas. The burning of fossil fuels emits greenhouse gases.

As Bill Gates writes in How to Avoid a Climate Disaster:

“Greenhouse gases trap heat, causing the average surface temperate of the earth to go up. The more gases there are, the more the temperature rises. And once greenhouse gases are in the atmosphere, they stay there for a very long time; something like one-fifth of the carbon dioxide emitted today will still be there in 10,000 years.”

Bitcoin mining adds to this pollution.

As Dylan Grice writes in the latest edition of the Popular Delusions newsletter: “China is also concerned that bitcoin mining in the country is coal intensive and that is complicating efforts to reduce pollution.”

While this is an extremely valid argument, the trouble is all this has been well known for a while. So, why is it being brought up now? And that’s where things get interesting. It is being brought up now simply because the Chinese governments cannot openly talk about the real reason behind cracking down on bitcoin and other cryptos.

And what’s the real reason?

The success of cryptocurrencies has made governments realise that they need to be in on the game as well. This has led to governments and central banks, including that of China, planning their own digital currencies.

What is a central bank digital currency?

As Mark Carney writes in Value(s)—Building a Better World For All:

“A central bank digital currency would be an electronic form of central bank money that could be used by the public to make digital payments. Currently when we make payments with our debit cards or mobile phones we are using private money originally created by banks. Our only access to the ultimate risk-free asset of the central bank is when we use physical cash.”

The use of physical cash is declining rapidly and central banks feel that they need to get into that space by creating their own digital currency. If they don’t get into that space and people start using other digital currencies, it creates a problem for them, albeit minor one initially, but still a problem.

As mentioned earlier, the governments have the right to create money out of thin air, and sharing that with others is something that they are obviously not comfortable with.

As Grice writes: “From what we can glean from our friends in China, its motivation [behind the crackdown] was partly related to the roll-out of its own digital currency.” China is planning to launch its own central bank digital currency and given that it wants to wean off its citizens from the various cryptocurrencies that they are currently using.

In fact, China is already testing its digital currency. A report on CNBC.com points out that the plan is to hand out 40 million renminbi (or around $6.2 million) to a group of people in a lottery. The money can then be spent with selected merchants.

Also, there is another factor at play. China has one of the highest investments to gross domestic product (GDP) ratios in the world. Data from World Bank points out that in 2019, the ratio for China stood at 43.3%, when the global ratio was at 24.4%.

Hence, a bulk of Chinese savings get channelised into investments and this has over the years helped create massive economic growth. Bitcoin and other cryptos allow the Chinese to tunnel their money out of China, something that the Chinese government isn’t comfortable with. And like the Chinese government most governments won’t be comfortable with this.

As Grice writes: “It [i.e. the Chinese government] wants to ensure that growing familiarity with digital currency among its population doesn’t translate into growing use of digital currencies to evade China’s capital controls.”

These are the lessons that other governments and central banks around the world can easily pick up from the latest Chinese crackdown on cryptos. Hence, in the time to come, the government crackdown on cryptos will only go up.

Privatization by Malign Neglect: Nationalized Banks Gave Out Just 6% of Banking Loans in 2020-21

One story that I have closely tracked over the years is the privatization of the Indian banking sector, despite the government continuing to own a majority stake in public sector banks (PSBs). I recently wrote a piece in the Mint newspaper regarding the same.

The moral of the story is that the PSBs have continued to lose market share to the private banks, over the years. This is true of both deposits as well as loans.

In the last decade and a half, when it comes to loans, the share of PSBs in the overall lending carried out by scheduled commercial banks in India  peaked at 75.1% in March 2010. As of March 2021, it had fallen to 56.5%.

When it comes to deposits, during the same period, the share of PSBs in the total deposits raised by scheduled commercial banks peaked at 74.8% in March 2012. As of March 2021, it had fallen to 61.3%. Meanwhile, the private banks had gained share both in loans as well as deposits. (For complete details read the Mint story mentioned earlier).

One feedback on the Mint story was to check for how well PSBs other than the State Bank of India (SBI), the largest PSB and the largest bank in India, have been doing. In this piece, I attempt to do that. Data for this piece has been drawn from the Centre for Monitoring Indian Economy (CMIE) and several investor presentations of SBI. The data takes into account the merger of SBI with its five associate banks as of April 1, 2017.

Let’s take a look at the findings point wise.

1)  Let’s start with the share of different kinds of banks in the overall banking loan pie.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

In the last 15 years, the share of SBI in the overall banking loan pie has been more or less constant (look at the blue curve, it seems as straight as a line). It was at 23.1% as of March 2006 and it stood at 22.7% as of March 2021. Clearly, SBI has managed to hold on to its market share in face of tough competition from private banks.

But the same cannot be said of the other PSBs, which are popularly referred to as nationalized banks, given that they were private banks earlier and were nationalized first in 1969 (14 banks) and later in 1980 (six banks).

The share of these banks in the lending pie has fallen from 47.9% in March 2006 to 33.8% in March 2021.

In fact, the fall started from March 2015 on, when the share of the nationalized banks in overall lending had stood at 50.1%. This is when the Reserve Bank of India (RBI) rightly started forcing these banks to recognise their bad loans as bad loans, something they had been avoiding doing since 2011, when the bad loans first started to accumulate. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more.

Not surprisingly, the share of private banks in the banking loan pie has been going up. It is up from 20% to 35.5% in the last 15 years, though a bulk of the gain has come from March 2015 onwards, when the share was at 20.8%. Clearly, the private banks have gained market share at the cost of nationalized banks. As stated earlier, SBI has managed to maintain its market share.

2) Now let’s take a look at the deposit share of different kinds of banks.

Source: Author calculations on data from
the Centre for Monitoring Indian Economy
and the investor presentations of SBI.

The first thing that comes out clearly is that the shape of the curves in this chart are like the earlier chart, telling us that conclusions are likely to be similar.

When it comes to overall banking deposits, the share of SBI has been more or less constant over the last 15 years. It has moved up a little from 23.3% to 23.8%, with very little volatility in between.

For nationalized banks, it has fallen from 48.5% to 37.4%, with a bulk of the fall coming post March 2015, when it had stood at 51%.

The fall in market share of nationalized banks has been captured by private banks, with their share moving up from 19.4% to 29.9% in the last 15 years. Again, a bulk of this gain has come post March 2015, when their market share was at 19.7%. Clearly, as nationalized banks have been trying to put their house back in order, private banks have moved in for the kill and captured market share.

The two charts clearly tell us that the banking scenario in India has been changing post March 2015, but they don’t show us the gravity of the situation.

To do that we need to look at the incremental loans given out by the banks each year and the incremental deposits raised by them during the same year. Up until now we were looking at the overall loans given out by banks and the overall deposits raised by them, at any given point of time.  

3) Let’s take a look at the share that different kinds of banks have had in incremental loans given out every year. Incremental loans are obtained in the following way. The outstanding bank loans of SBI stood at Rs 25 lakh crore as of March 2021. They had stood at around Rs 23.7 lakh crore as of March 2020.

The incremental loans given between March 2020 and March 2021, stood at Rs 1.3 lakh crore. This is how the calculation is carried out for different banks across different years. The number is then divided by the incremental loans given out by scheduled commercial banks, and the market share of different kind of banks is obtained.

In 2020-21, the total incremental loans given by the banks stood at Rs 5.2 lakh crore. Of this, SBI had given out around Rs 1.3 lakh crore and hence, it had a market share of around one-fourth, when it came to incremental loans given by banks.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

The above chart tells us is that post March 2015, a bulk of incremental lending has been carried out by private banks. In 2014-15, the private banks carried out by 35.6% of incremental lending. This touched a peak of 79.5% in 2015-16 and their share was at 58.9% in 2020-21, the last financial year.

SBI’s share in incremental lending hasn’t moved around much and it stood at 24.4% in 2020-21.

The real story lies with the nationalized banks. Their share of incremental lending has collapsed from a little over half of the incremental lending in 2013-14 to just 0.2% in 2019-20. In 2020-21, it was slightly better at 6.3%.

These banks have barely carried out any lending in the last five years, with their share being limited to 6.1% of the incremental loans that have been given during the period. SBI’s share stands at 25.3% and that of private banks at 59.9%.

4) Now let’s look at how the share of incremental deposits of different kinds of banks over the years.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

This is perhaps the most noisy of all the charts up until now. But even here it is clear that the share of nationalized banks in incremental deposits has come down over the years. It was at 50.9% in 2013-14. In 2017-18, the deposits of nationalized banks saw a contraction of 8.5%, meaning that the total deposits they had went down between March 2017 and March 2018. In 2020-21, their share of incremental deposits stood at 26.3%.

The chart also tells us that in the last six years, the private banks have raised more deposits during each financial year, than SBI and nationalized banks have done on their own.

5) In the following chart, the incremental loan-deposit ratio of banks has been calculated. This is done by taking the incremental loans given by banks during a particular year and dividing it by the incremental deposits raised during the year.

Source: Author calculations on data from the
Centre for Monitoring Indian Economy
and the investor presentations of SBI.

The curve for non SBI PSBs is broken because in 2017-18,
the banks saw a deposit contraction,
and hence, the incremental loan deposit ratio
of that year cannot be calculated.

The incremental loan deposit ratio of nationalized banks collapsed to 0.5% in 2019-20 and 7.4% in 2020-21. What this means is that while these banks continue to raise deposits, they have barely given out any loans over the last two years. In 2019-20, for every Rs 100 rupees they raised as a deposit they gave out 50 paisa as a loan (Yes, you read that right!). In 2020-21, for every Rs 100, they raised as a deposit they gave out Rs 7.4 as a loan.

One reason for this lies in the fact that many of these banks were rightly placed under a prompt corrective action (PCA) framework post 2017 to allow them to handle their bad loan issues.

This placed limits on their ability to lend and borrow. Viral Acharya, who was a deputy governor of the RBI at that point of time, did some plain-speaking in a speech where he explained the true objective of the PCA framework:

“Such action should entail no further growth in deposit base and lending for the worst-capitalized banks. This will ensure a gradual “runoff” of such banks, and encourage deposit migration away from the weakest PSBs to healthier PSBs and private sector banks.”

The idea behind the PCA framework was to drive new business away from the weak banks, give them time to heal and recover, and at the same time ensure they don’t make newer mistakes and in the process minimize the further accumulation of bad loans. This came at the cost of the banks having to go slow on lending.

As I keep saying there is no free lunch in economics. All this happened because these banks did not recognise their bad loans as bad loans between 2011 and 2014, and only did so when they were forced by the RBI mid 2015 onwards.

There is a lesson that we need to learn here. The bad loans of banks will start accumulating again as the post covid stress will lead to and is leading to loan defaults. It is important that banks do not indulge in the same hanky-panky that they did post 2011 and recognise their bad loans as bad loans, as soon as possible.

What banks did between 2011 and 2014, when it comes to bad loans, has already cost the Indian banking sector a close to a decade. The same mistake shouldn’t be made all over again.

Now with many of the nationalized banks out of the PCA framework, their deposit franchises remain intact, nonetheless, they don’t seem to be in the mood to lend or prospective borrowers don’t seem to be in the mood to borrow from these banks, and perhaps find borrowing from private banks, easier and faster.

Of course, one needs to keep in mind the fact that 2020-21 was a pandemic year, and the overall lending remained subdued.

Meanwhile, the private banks keep gaining market share at the cost of the nationalized banks. This means that by the time the government gets around to privatizing some of these banks, if at all it does, their business models are likely to have completely broken down. They will have deposit bases without adequate lending activity. 

The nation shall witness what Ruchir Sharma of Morgan Stanley calls privatization by malign neglect, play out all over again, like it had in the airline sector and the telecom sector, before this.


When It Comes to Vaccines, Govt Tells Us One Thing, Supreme Court Another

On May 13, the government told us that between August and December this year, the covid vaccine availability/production will be ramped to around 216 crore doses. Tweets were published by several government handles. (You can take a look here and here).

Many media reports were also published regarding the same. As the Mumbai edition of The Times of India reported on May 14: “Setting out its roadmap to vaccinate the around 95 crore 18-plus population, the Centre said on Thursday India should be able to access nearly 217 crore doses between August and December.”

The following table shows how the 216-crore number was arrived at.

Source: Ministry of Health and Family Welfare. In case you are unable to see the table, click here.

Several ministers reiterated this message. Prakash Javadekar, who holds multiple portfolios in the government, said: “India will get 216 crore new vaccines by December. India will be able to vaccinate more than 108 crore people with the help of these vaccines.” The health minister Dr Harsh Vardhan also made a similar statement.

The underlying message here was that the vaccine shortage, if any, would not be a problem in the months to come. Over the next few days, WhatsApp and other social media kept buzzing with this message. The above table was shared over and over again. The Be Positive crowd had a field day. So far so good.

The trouble is that the numbers in the table are just that, numbers. Allow me to explain.

75 crore doses of the Covishield vaccine are expected to become available between August and December, a period of five months. This implies a production capacity of 15 crore doses per month on an average.

In a submission to the Supreme Court on May 9, the government had said that the manufacturing capacity of the Serum Institute, the company which manufactures Covishield, is expected to go up from 5 crore doses per month to 6.5 crore doses by July 2021. Increasing production capacity from 6.5 crore doses per month to 15 crore doses per month is going to be some task.

Of course, the government always has the option of importing the Astra-Zeneca vaccine doses (which is locally manufactured as Covishield). But even if the government decides to import, the difference between the local production capacity and the projection of 15 crore doses per month on an average, is huge. Further, any imports will come at the expense of denting the atma nirbharta narrative.

When it comes to Covaxin, the estimated production between August and December has been assumed to be at 55 crore doses. This implies a production of 11 crore doses per month on an average.

The central government told the Supreme Court on May 9 that the manufacturing capacity of Bharat Biotech, the company which currently manufactures Covaxin, is expected to go up from 90 lakh doses per month to 2 crore doses per month, and further increase to 5.5 crore doses per month by July 2021. So, 5.5 crore doses a month is half of the 11 crore doses per month that is required as per the government’s calculation.

Of course, it needs to be remembered that the intellectual property for Covaxin is shared between Bharat Biotech and the Indian Council of Medical Research. Hence, Covaxin will also be manufactured by three public sector manufacturing facilities. These are Indian Immunologicals, Hyderabad, Haffkine Biopharmaceuticals, Mumbai, and Bharat Immunologicals and Biologicals, Bulandshar.

Based on this, the government told the Supreme Court: “This is projected to enhance Covaxin‟s current manufacturing of 1 crore doses/month to nearly 10 crore doses/month in the next 8-10 months.”

So, Covaxin’s production is expected to touch 10 crore doses per month only in 2022. At least, that’s what the central government told the Supreme Court. Nevertheless, that did not stop them from telling you and I, that 11 crore doses per month of Covaxin will be produced on an average between August and December. Given this, the vaccine production projections made by the government, don’t pass the basic smell test. 

And we aren’t done with this yet. A close look at the above table tells us that it also includes doses from vaccines which haven’t been cleared for production. In fact, this was precisely the point made by the two amici appointed by the Supreme Court ( Jaideep Gupta and Ms Meenakshi Arora) in the Suo Moto writ petition that the Court is currently hearing.

As Wikipedia points out: “An amicus curiae (literally, “friend of the court”; plural: amici curiae) is someone who is not a party to a case who assists a court by offering information, expertise, or insight that has a bearing on the issues in the case.”

As the Amici told the Supreme Court:

“The [central government] has claimed that it will be able to vaccinate a substantial number of persons (around 100 crore persons requiring 200 crore doses) by December 2021. However, no projections have been shared with this Court regarding how this target would be achieved. Based on reports, it appears that the [central government] has factored a number of vaccines that are currently in their development stages to reach its projected number of 200 crore doses. This approach would be misguided as the success and efficacy of vaccines that are currently in the stage of clinical trials is uncertain and cannot be guaranteed.”

The interesting thing is that the central government hasn’t presented any projections of vaccine availability to the Supreme Court and in an affidavit submitted to the Court on May 9, it said: “It is difficult to predict the projections for vaccines given that it depends on variable factors such as introduction of new foreign vaccines, capability of increased production by existing manufacturers, among others.”

Of course, the variable factors did not stop the government in confidently telling us that 216 crore vaccine doses would become available between August and December, later this year. Something, it didn’t have the confidence to tell the Supreme Court on May 9, it told the country on May 13, four days later, and has been saying it over and over again since then.

What this tells us is that the submissions to the Supreme Court are clearly not good WhatsApp material and hence, things can be said as the way they are.

Nevertheless, the Solicitor General, during the course of his oral submissions to the Supreme Court, did say: “He is in a position to address these concerns of this Court and that the UoI aims to vaccinate approximately 100 crore persons by the end of December 2021.”

Nonetheless, there is a huge difference between an aim, a plan, and a projection, as we have seen in the calculations earlier in this piece. Numbers are just numbers and can easily be tortured to arrive at what one wants to say. The table accompanying this piece is an excellent example of this phenomenon.  

But then on WhatsApp who is bothered about the details and the nuance. So, the main aim of the government was to project a confident be positive narrative and it did just that.

To conclude, it is safe to say that there is one truth out there for the Supreme Court and another for the country at large.

On Being Positive – Do You Have Your Bullshit Receptors On?

Be positive.

My friends have told me to be positive.

My extended family has asked me to be positive.

Unknown people on the social media have suggested the same.

Because in their heads they feel that being positive will drive us out of the rut and all the troubles that we currently find ourselves in.

Of course, it’s not as simple as that. It never is. 

Dear Reader, have you ever wondered why the be positive messages started going around on WhatsApp, Twitter, Instagram, LinkedIn and what not, last month, right in the middle of the worst phase of the second wave of the covid pandemic? People were dying. People were not getting oxygen, beds or medicines for that matter, and in the middle of all this man made chaos, friends and family, were sending WhatsApp messages promoting the idea of being positive. 

Well, if you are like the people who have been asking me and others to be positive, you clearly didn’t think about it. This is simply because you were busy being positive and didn’t bother to figure out why this bullshit of being positive came up right when it did and not before or after.

The Nobel Prize winning psychologist Daniel Kahneman along with Olivier Sibony and Cass Sunstein, have got a possible answer for this in the book Noise—A Flaw in Human Judgement.

As they write:

“Sure enough, some people are more receptive than others to bullshit. They can be impressed by “seemingly impressive assertions that are presented as true and meaningful but are actually vacuous.””

The word vacuous means empty or mindless. From religious gurus to corporate gurus to religious gurus morphing as corporate gurus (yes there is a category like that as well), follow this formula with great success. Doing this involves use of phrases and sentences which sound profound when heard, but mean nothing, if you sit and think about it.

As Kahneman, Sibony and Sunstein write:

“Gordon Pennycook and colleagues have conducted many studies of people’s reactions to meaningless, pseudo-profound statements generated by assembling randomly selected nouns and verbs from the sayings of popular gurus into grammatically correct sentences, such as “Wholeness quiets infinite phenomena” or “Hidden meaning transforms unparalleled abstract beauty.” The propensity to agree with such statements is a trait known as bullshit receptivity.”

In order to make the population at large receptive of bullshit, it is important that they are in a good mood. While  doing this would have been very difficult earlier, now with cheap internet and rock-bottom mobile phone rates, and many smart phones going around, people can be bombarded endlessly with messages of being positive. It doesn’t cost anything except a few message writers, who are available dime a dozen.

As the authors point out:

“Inducing good moods makes people more receptive to bullshit and more gullible in general; they are less apt to detect deception or identify misleading information.”

And this is where the entire idea of being positive which has been promoted so extensively over the last one month, comes in.

The idea is to make sure that people are in a good mood and hence, more receptive to misleading explanations around why there is shortage of vaccines, why the government was caught totally unprepared for the second wave and why the government is not be blamed for all this. And it needs to be given the benefit of doubt.

Recently I was told by someone that the vaccine shortage is primarily because of journalists (yes, journalists). They wrote columns questioning the efficacy of the vaccines. This led to a situation where many people did not vaccinate between January and March, before the second wave broke out, as they thought the vaccines are not safe.

Given that enough people were not getting themselves vaccinated, the government ended up exporting six crore doses. Hence, now there is a shortage, and the government can’t be blamed for it, because journalists questioned vaccine efficacy. This is one argument going around among the be positive crowd.

There are many ways of puncturing this argument but let me use the simplest one. The current government has no interest in listening to journalists or anyone else who does not conform to their way of things. So why would they listen to them on just this issue? The more important question is why the government did not bother to order enough vaccines in advance, like governments of so many countries did.

The government didn’t do this simply because it got caught in its own rhetoric of India having successfully beaten the covid pandemic. The trouble with government propaganda is that sometimes the governments end up believing in it and the citizens have to bear its cost, which they currently clearly are, though many of them are busy being positive. 

It is important to keep in mind what Carl Bergstrom and Jevin West write in Calling Bullshit – The Art of Scepticism in a Data Driven World:

“Human language is immensely expressive, in the sense that we can combine words in a vast number of ways to convey different ideas… This is a good skill to have when trying to communicate efficiently—and it’s equally useful when using communication to manipulate another person’s beliefs or actions. That’s the thing about communication. It’s a two-edged sword.”

The entire be positive campaign (can’t think of a better word to describe it), is what the American philosopher Harry Frankfurt called a deliberate misrepresentation in his book On Bullshit.  And this deliberate misrepresentation has been carried out to ensure that there are no scratches on the teflon coating surrounding the government. 

To conclude, be positive in 2021 is basically what acche din aane waale hain was in 2014. They are two sides of the same coin. They were both designed to mislead.