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Virtual control: the agenda behind China’s new digital currency

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Celebrations in China to mark the lunar new year of the Ox, which began on February 12, have been somewhat muted because of the coronavirus pandemic. The numbers of people travelling to visit relatives this year are down sharply, depriving family gatherings of a measure of joy.

But it is not all gloom. Authorities in several cities have given away tens of millions of renminbi as new year “red packets” that can be downloaded on to a smartphone. Beijing and Suzhou alone have doled out 200,000 red packets worth Rmb200 ($31) each in a public lottery.

Such philanthropy conceals a harder-hitting agenda. By handing out the traditional red packets in the form of “digital renminbi”, China’s authorities are conducting trials for a crucial new technology that could lead the world’s adoption of digital currencies and set global technical standards.

Although no official launch date has been announced, China is intent on becoming the first large economy to introduce a digital currency, showcasing its position as the global leader in payments technology to the world at next year’s Winter Olympics. Cambodia launched a digital currency, the Bakong, late last year. 

“Chinese policymakers are by far the most advanced in their thinking about a digital currency,” says the head of Asia business at a leading Wall Street bank, who declined to be named. “They are thinking about things that the rest of the world is nowhere near thinking about yet.”

“The digital renminbi will put every transaction on to the radar of the People’s Bank of China [central bank],” the banker adds.

A customer shows an ‘e-yuan’ on her smartphone in Beijing. The digital currency is issued and regulated by China’s central bank and is guaranteed by the state
A customer shows an ‘e-yuan’ on her smartphone in Beijing. The digital currency is issued and regulated by China’s central bank and is guaranteed by the state © Getty Images

China’s digital plan dovetails with broader ambitions for its currency as Beijing hopes the technology will help promote the renminbi internationally and weaken the US dollar’s supremacy. While bankers say the focus initially will be on using the digital currency in the domestic economy, it will probably be used for trade settlement in a number of years, several Chinese analysts said.

But the other objectives behind China’s virtual currency present a sharp contrast with public discussion about the issue in many other parts of the world. While in the US cryptocurrencies are steeped in the language of libertarianism, in China the digital currency project is tied up in the Communist party’s drive to maintain its control over society and the economy. The technology is partly designed to reinforce its surveillance state.

China’s digital renminbi is a “central bank digital currency”, making it in some ways the opposite of cryptocurrencies such as bitcoin. Cryptocurrencies are often decentralised; they are not issued or backed by governments. The “e-yuan”, by contrast, is part of China’s top-down design. It is issued and regulated by the central bank and its status as legal tender is guaranteed by the Chinese state.

BigRead: China has been one of the quickest adopters of digital payment systems

Its digital format enables the central bank to track all transactions at the individual level in real time. Beijing aims to use this feature to combat money laundering, corruption and the financing of “terrorism” at home by strengthening the already formidable surveillance powers of the ruling Communist party.

Beijing also hopes, analysts say, to use the digital renminbi as a means to reassert state control over its fintech industry and a vast e-payments market that is dominated by two huge private companies, Ant Group and Tencent. The technology could in effect become a rival to their cashless payments platforms.

China’s government is already engaged in a multipronged effort to rein in the power of the new payments firms, which led to Ant cancelling a planned $37bn initial public offering at the end of last year.

Samantha Hoffman, senior analyst at the Australian Strategic Policy Institute (ASPI), says social control is a priority for Beijing. “The [digital renminbi] is heavily about the party’s ability to exercise control,” she says.

Huge ramifications

China’s strategy is to popularise the digital currency by running city-level trials this year and next, having it ready for use by the time it hosts the Winter Olympic Games in late 2022, officials have said. This timetable puts Beijing far ahead of a long tail of national governments that are starting to experiment with the idea.

Some 60 per cent of more than 60 central banks surveyed by the Bank for International Settlements last year said they were “conducting experiments or proof-of-concept” studies on digital currencies, up from 42 per cent in 2019. Among these, 14 per cent are moving towards pilot programmes, the survey found.

In China, as elsewhere, the ramifications of adopting a digital currency are huge. It is not just that the digital renminbi stands to replace cash. It also presages the construction of a new payments system that threatens to undermine the market position of Alipay and WeChat Pay, the two wildly popular and privately owned platforms run by Ant Group and Tencent.

A Chinese shopper uses the WeChat Pay app in Beijing. While merchants can refuse to accept Alipay and WeChat Pay, they cannot decline to use the digital renminbi
A Chinese shopper uses the WeChat Pay app in Beijing. While merchants can refuse to accept Alipay and WeChat Pay, they cannot decline to use the digital renminbi © Kevin Frayer/Getty Images

The main reason for this is that the digital renminbi is distributed directly to the e-wallets of users by state-owned banks, thus setting up payments channels that circumvent Alipay and WeChat Pay.

In trials so far, users have been able to withdraw e-yuan via ATM machines on to their smartphones’ e-wallets. Then they pay for items by holding their smartphone app close to an e-yuan point-of-sale device. Such a system represents a clear alternative to Alipay and WeChat Pay, which are estimated to have a combined worldwide active user base of around 1.9bn.

“The wide use of the digital renminbi will affect the market position and profit model of third-party payment platforms like Alipay and WeChat pay,” says Wang Yongli, a former vice-president of Bank of China, one of China’s largest state-owned banks.

This is no small matter. Alipay and WeChat Pay not only form the backbone of China’s payments system in an economy that is already largely cashless. Their business also supports the share prices of Tencent, which is one of the world’s 10 largest companies with a capitalisation of more than $920bn, and Alibaba, which owns a stake in Ant Group.

A sense that the popularisation of the digital renminbi could come at the expense of Alipay and WeChat Pay is reinforced by Beijing’s messaging through state media coverage. In a dispatch from the streets of Beijing during Chinese new year, a reporter from CCTV, the official television station, said that using the e-yuan was “more convenient” than other payments systems.

BigRead: Most Chinese consumers now use online payments

“The digital currency will deal a blow to Alipay and WeChat as it could replace them,” says a director at a large state-owned bank. “It is likely that the government will use administrative power to promote the use of digital renminbi to undermine the monopoly on consumer data held by the technology firms.”

In fact, such administrative powers are inherent to the e-yuan itself. Because the digital renminbi is legal tender, no merchant can refuse to accept it and will, therefore, be obliged to install e-yuan terminals and payments systems after the currency is formally launched. The same is not the case for Alipay and WeChat Pay, which merchants are at liberty to refuse.

State media reports also trumpet a function of the e-yuan which they say makes it just as versatile as cash: the capacity for offline payments. If there is no internet connection, users can still transfer money between two offline devices by using what the state media calls “dual offline technology”.

This feature uses a type of near-field communications technology similar to Bluetooth, analysts say. It is not yet clear how reliable such systems — or the digital renminbi more generally — would turn out to be but Mu Changchun, head of the central bank’s Digital Currency Research Institute, has said that the “dual offline” technology has been “comparatively successful”.

China regards its centralised banking system as a crucial instrument of the party-state’s economic power. Whenever its control is threatened, as it was by the flowering of a freewheeling peer-to-peer lending sector as recently as 2016, the authorities move decisively to reassert their influence. Only some 29 of as many as 6,000 peer-to-peer lenders now remain following Beijing’s clean-up campaign. Similarly, the extraordinary success of Ant Group, before its share offering was axed, was seen as a threat by a powerful lobby of Chinese state-owned banks. 

Pedestrians pass the National Stadium in Beijing, which host some events of next years Winter Olympics. China intends to run trials of its digital currency this year and have it ready for use during the games
Pedestrians pass the National Stadium in Beijing, which hosts some events at next year’s Winter Olympics. China intends to run trials of its digital currency this year and have it ready for use during the games © Mark Schiefelbein/AP

While it is clear that the digital renminbi payments ecosystem has been designed to run independently of Alipay and WeChat Pay, it is likely that the two private payments platforms will nevertheless also be used for e-yuan transactions, analysts say. Thus, for a while at least, the private platforms will be enlisted to promote the e-yuan’s rise.

“The increase of digital renminbi’s market share will come at the expense of WeChat Pay and Alipay,” says Zou Chuanwei, a specialist in digital currency at Wanxiang Blockchain, a research institute in Shanghai. “The government is tightening regulatory control over fintech groups and the digital currency’s replacement of Alipay and WeChat Pay will hurt their consumer lending business,” he adds.

Tool of control

Fifteen centuries after China invented banknotes, the nature of money is set to fundamentally change. Back then, in the Tang dynasty (618 to 907) paper money was little more than an IOU and became known as “flying cash” because, unlike metal money, it had a tendency to blow away.

But the digital renminbi presents a step change. It is far more than just a medium for exchange. Beijing sees it both as a bulwark against the potential encroachment of foreign digital currencies, such as Facebook’s Diem, and as a tool to facilitate mass surveillance over the Chinese population, analysts say.

In mid-2020, Mu at the Digital Currency Research Institute argued that the digital renminbi would prevent Facebook’s Libra — the original name for Diem — from encroaching on China’s monetary system. Such thinking followed similar soundings from 2018 when central bank researchers warned that the advent of digital tokens — called stablecoins — linked to the US dollar could damage Beijing’s efforts to internationalise the renminbi.

But aside from acting as a bulwark against unwanted foreign cryptocurrencies, Beijing’s ambitions for the digital renminbi derive from a deep-seated impulse towards social control, analysts say.

Police patrol in front of the People’s Bank of China in Beijing. Samantha Hoffman of the ASPI says ‘the [digital renminbi] is heavily about the party’s ability to exercise control’
Police patrol in front of the People’s Bank of China in Beijing. Samantha Hoffman of the ASPI says ‘the [digital renminbi] is heavily about the party’s ability to exercise control’ © Greg Baker/Getty Images

“The digital renminbi is likely to be a boon for CCP surveillance in the economy and for government interference in the lives of Chinese citizens,” wrote Yaya Fanusie and Emily Jin in a report last month for the Centre for a New American Security, a Washington-based think-tank.

They say that deploying the e-yuan will set the central bank up to mine a huge trove of data on its citizens’ economic activity. This dovetails with a government fintech plan issued in late 2019 that foresaw a fusion of financial data to promote the construction of a “nationwide integrated big data centre”.

“If the central bank can successfully roll out the digital renminbi, it indeed would be a crucial tool for domestic control,” says Jin. “People could still try to circumvent the monitoring capability of [the currency], but I’d imagine that would be incredibly difficult given that the system would allow the central bank to track real-time transactions.”

If such capabilities do materialise, the People’s Bank of China could take on enhanced powers of discipline enforcement and would have the ability to take punitive action by blocking transactions if the situation called for it.

Hoffman at the ASPI, which published one of the first in-depth reports on the digital renminbi last year, says the e-yuan will significantly expand the party’s surveillance capabilities.

“Through the [virtual currency] the party-state would have visibility over all financial transactions,” she says. “The transactions are fully traceable, and there will be no such thing as true anonymity for users.”

Exemptions from scrutiny?

The level of anonymity that will be accorded Chinese citizens who use the digital currency remains an officially grey area. Mu at the Digital Currency Research Institute, speaking at a conference in Singapore last year, said that a system of “controllable anonymity” would be rolled out. 

Mu Changchun of the Digital Currency Research Institute says the digital renminbi would prevent Facebook’s digital currency from encroaching on China’s monetary system
Mu Changchun of the Digital Currency Research Institute says the digital renminbi would prevent Facebook’s digital currency from encroaching on China’s monetary system © Getty Images

“We know the demand from the general public is to keep anonymity by using paper money and coins . . . we will give those people who demand it anonymity in their transactions,” Mu told the conference. 

“But at the same time, we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF [counter-terrorist financing], and also tax issues, online gambling and any electronic criminal activities,” he added.

Hoffman says such ambiguity raises concerns. “Requirements like anti-terrorist financing or anti-money laundering are normal for central banks, but what is different in China is who is scrutinised,” she says. “The definition of a terrorist includes the party’s political opponents.” 

Such concerns could hamper Beijing’s longstanding aspirations to promote the use of its currency internationally as part of China’s long-range ambition to free itself from having to settle most of its trade transactions in the US dollar.

“If the Communist party will get insight into every trade we do through the digital renminbi, then I think a lot of people outside China will prefer not to use it,” says one businessperson in Hong Kong, who declined to be named.

Nevertheless, China is pressing on with its internationalising verve. It agreed last month to form a joint venture with Swift, the Belgium-based global system for cross-border payments, in a move that observers say is aimed at promoting use of the digital renminbi.

The new entity, called Finance Gateway Information Services Co, is charged with integrating information systems to facilitate the rollout of the digital currency, according to people familiar with the venture. Other shareholders in the venture include China’s Cross-Border Interbank Payment System (Cips), a competitor of Swift that handles trade settlement in renminbi. 

However, even bankers within China’s own state-dominated system say that optimism about the international uptake of the digital renminbi must be tempered by reality. “A bigger goal of ours is to challenge the dominance of the US dollar in international trade settlement,” says the director at a large state-owned bank. “But progress towards this will only be gradual.”

The reasons behind such expectations of slow progress derive from an old-fashioned, analogue problem. Foreigners have little incentive to hold renminbi as long as access to China’s financial markets remains complex and opaque to all but specialist investors.

“[A digital renminbi] would not banish many of the problems holding the renminbi back from more use globally,” said Maximilian Kärnfelt, an expert at Merics, a Berlin-based think-tank on China. “Much of China’s financial market is still not open to foreigners and property rights remain fragile. ”

Additional reporting by Hudson Lockett in Hong Kong



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Australia’s treasurer warns global stimulus threatens financial stability

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Australia has warned that unprecedented global stimulus efforts during the coronavirus pandemic are creating financial stability risks that will only intensify when interest rates inevitably rise.

Canberra has also defended tough new foreign investment rules that have led to a collapse in Chinese investment, arguing the number of proposed deals motivated by strategic, rather than purely commercial gain, was increasing.

Josh Frydenberg, Australia’s treasurer, said the Pacific nation was in a strong economic position as its net debt to gross domestic product was about half that of other advanced economies, even as it begins unwinding fiscal stimulus.

“There is no doubt elevated debt levels will create challenges for many countries. While global interest rates are low those debt levels can be serviceable — but there will be a time when the monetary policy settings change,” he told the Financial Times.

Frydenberg’s comments on the risks posed by global stimulus followed a similar warning delivered last week by Peter Costello, a close political ally and former Australia treasurer.

Australia will be among the first advanced economies to taper off Covid-19 fiscal stimulus with the closure of its A$90bn (US$70bn) JobKeeper wage subsidy scheme this month.

Canberra has argued that the recovery is already under way, citing a fall in unemployment to 6.4 per cent in January and a 3.3 per cent economic expansion in the three months to September last year.

Frydenberg, who counts Margaret Thatcher and Ronald Reagan among his role models, said the government’s A$250bn stimulus was required to stabilise the economy during the pandemic. But he said JobKeeper, which supported 3.6m workers at its peak, was no longer needed as the recovery could be supported by tax cuts, which were announced last year.

Asked if he thought the economic policies of Thatcher and Reagan were still relevant, he said: “[Reagan and Thatcher] achieved a lot when they were in office and they were committed to lower taxes. They were committed to cutting regulation and that’s certainly what I’ve been committed to as well.”

But trade unions and businesses that are still suffering as a result of border closures and restrictions, particularly in the tourism and entertainment sectors, have warned that the scheme’s closure will dent the economy.

“JobKeeper should be extended for those businesses that are still affected by coronavirus. [Through] no fault of their own, they are suffering that downturn,” said Sally McManus, secretary of the Australian Council of Trade Unions, last week. “And we say that because that will save jobs.”

Josh Frydenberg, Australia’s treasurer, is a rising star in the country’s conservative government and is tipped as a future prime minister © AP

Frydenberg, who was the architect of foreign investment rules aimed at countering rising Chinese influence, said he made no apologies for putting “national interest” at the heart of Australia’s investment policies.

Chinese investment fell 61 per cent last year to A$1bn, down from A$2.6bn in 2019 and a peak in 2016 of A$16.5bn, data showed. Frydenberg was instrumental in blocking two potential deals: China Mengniu’s A$600m bid for Japan-owned Lion Dairy and China State Construction Engineering Corp’s A$300m bid for Probuild, a South Africa-owned construction company.

“We absolutely reserve the right to make decisions around foreign investment based on national interest and having put in place an explicit national security test allows us to do that,” he said.

“Increasingly we’ve seen foreign investment proposals that have been motivated not by purely commercial gains but more strategic ones. When those foreign investment proposals potentially compromise the national interest, then we reserve the right to say no.”

Frydenberg said Australia was not alone in tightening its rules, noting that other countries shared Canberra’s views on national sovereignty and foreign investment.

“Obviously we have had some challenges with China,” he said when asked about Beijing’s imposition of trade sanctions on a range of Australia’s exports following Canberra’s call last year for an inquiry into the origins of Covid-19 in Wuhan.

Frydenberg insisted that Australian ministers were prepared to sit down with their Chinese counterparts to discuss the bilateral relationship but only on a “no conditions attached” basis.

“It is a mutually beneficial trading relationship — we supply the bulk of their iron ore and that iron ore has helped underpin their economic growth,” he said.

Frydenberg is a rising star in Australia’s conservative government and is tipped as a future prime minister.

Last week, he shot to global attention following several days of negotiation with Facebook’s Mark Zuckerberg over the social media company’s decision to block news on its platforms in Australia in response to a law forcing it to pay news publishers.

On Friday, Facebook “refriended Australia” and returned news to its Australian platform following amendments that may make it easier for the company to avoid the toughest elements of the law.

“Trying to negotiate with these guys is a bit like playing chess against a chess master,” said Frydenberg, who joked that he spoke to Zuckerberg more than his own wife last week.

“The reality is they are massive companies with huge balance sheets and global reach. If this was easy other countries would have done it [made Big Tech pay for news] long ago.” 



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Ecuador’s exporters caught between US and China after debt deal

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Exporters in Ecuador are worried that their all-important trade with China will suffer as a result of a controversial agreement the US says is aimed at shutting China out of the South American country’s 5G telecoms network.

The agreement, signed by the US International Development Finance Corporation (DFC) and the Ecuadorean government just days before Donald Trump left office in January, envisages the US buying oil and infrastructure assets in Ecuador on the understanding Quito uses the proceeds to pay off its debt to China.

It also obliges Ecuador to sign up to what the Trump administration called the “Clean Network” — a state department initiative designed to ensure that nations exclude Chinese telecoms services and equipment providers as they build out their high-speed 5G mobile networks.

Adam Boehler, the recently departed chief executive of DFC, has described the deal as a “novel model” to eject China from the Latin American nation.

But it has caused unease in Ecuador, which has become increasingly reliant on exports to China.

“The announcement has generated a lot of inquiries and a lot of doubts,” said Gustavo Cáceres, head of the Ecuadorean-China Chamber of Commerce (CCECH). “We hope our authorities handle this in the best way possible so as not to give the impression that we’re turning our backs on China.”

One of the smallest countries in South America, Ecuador has traditionally exported primarily to the US and Europe, but China is fast catching up. Its share of Ecuador’s exports jumped from 3.9 per cent in 2015 to 15.8 per cent. In the same period, the US’s share fell from 39.4 per cent to 23.7 per cent.

The Chinese buy oil, shrimp, bananas, cut flowers, cacao and timber from Ecuador. Last year, despite the coronavirus pandemic, Ecuador’s exports to China grew more than 10 per cent and, for the first time, the country boasted a trade surplus with Beijing.

The shrimp industry has become particularly important. Since 2016, Ecuador’s shrimp exports worldwide have jumped 86 per cent. The nation of just 17.4m people is now the largest exporter of shrimp in the world, having overtaken India last year, when it exported 676,000 metric tonnes of the crustaceans in trade worth $3.6bn. After oil, shrimp were the country’s most lucrative export commodity.

Over half of that went to China, which, with its expanding middle class, is acquiring a taste for seafood once seen as a luxury.

“China will remain our main market,” forecast José Antonio Camposano, president of Ecuador’s National Chamber of Aquaculture (CNA), which oversees the industry. “We need a smart approach to China. A market of 1.4bn people with the acquisitive power that the Chinese have? I’m a businessman, how can I say no to that?”

The CNA was sufficiently worried by Ecuador’s agreement with the US that it sent a three-page letter to Ecuador’s president Lenin Moreno reminding him of China’s buying power.

While the letter did not mention the DFC deal directly, it urged Moreno — who in his four years in power has shifted Ecuador’s axis away from Beijing and towards Washington, reviving relations with the IMF and renegotiating the country’s debt to bondholders — “to reinforce with senior Chinese leaders the point that the excellent relationship between Ecuador and China remains intact”.

Freshly caught shrimp being packed into containers in Ecuador in 2011
Ecuador’s shrimp industry has fed a growing appetite among China’s expanding middle class © Bloomberg

China’s ambassador to Ecuador, Chen Guoyou, said he was unconcerned by the DFC deal and described media reports that it excluded Chinese companies from Ecuador’s telecoms network as “over-interpretation and gratuitous assumption”.

“China respects the sovereign and independent decision of the Ecuadorean government to develop pragmatic, balanced and diverse partnerships with other countries,” he told the Financial Times in an email.

Responding to his comments, one of the former Trump administration officials who negotiated the deal said it had been made explicitly clear in the text that the agreement was contingent on the country participating in the “Clean Network” — which would prevent it from including Huawei or any other Chinese company in its telecoms network.

The future of the deal, and indeed Ecuador’s future relations with China and the US, will depend in part on the outcome of the country’s presidential election on April 11. It pits leftwing economist Andrés Arauz against Guillermo Lasso, a conservative former banker. 

Arauz has the backing of Rafael Correa who took Ecuador out of the US’s orbit and pushed it towards China while serving as president from 2007 until 2017. He broke off relations with Washington’s financial institutions and signed a series of loans-for-oil deals with the Chinese. If Arauz wins the election he is likely to seek support from Beijing and might rip up the DFC agreement, particularly now Trump is no longer in office.

In contrast, Lasso told the FT previously the deal was “a pleasant surprise” and “good news” for Ecuador.

“It’s clear that the US is our principal ally and in my government I would look for an even closer alliance with the US,” he said.



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Brazil virus variant found to evade natural immunity

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The P.1 Covid-19 variant that originated in Brazil and has spread to more than 25 countries is around twice as transmissible as some other strains and is more likely to evade the natural immunity people usually develop from prior infection, according to a new international study.

The research, conducted by a UK-Brazilian team of researchers from institutions including Oxford university, Imperial College London, the University of São Paulo, found that the P.1 variant was between 1.4 and 2.2 times more transmissible than other variants circulating in Brazil. 

It was also “able to evade 25-61 per cent of protective immunity elicited by previous infection” with any earlier variant, the researchers found, in a sign that current vaccines could also be less effective against it.

International concern about the P.1 variant has escalated recently, with more than 25 countries detecting the variant, including Belgium, Sweden and the UK, which has identified six cases.

The scientists are expected to release a paper describing the research on Tuesday. Dr Nuno Faria, the lead author, did not immediately respond to a request for comment. The study has not yet been peer reviewed.

The researchers have dated the emergence of the P.1 variant to November 6, 2020, around one month before cases began to surge for a second time in the Brazilian city of Manaus. They found that the proportion of cases classified as P.1 in Manaus increased from zero to 87 per cent in the space of 7 weeks. 

The paper concluded: “Our results further show that natural immunity waning alone is unlikely to explain the observed dynamics in Manaus, with support for P.1 possessing altered epidemiological characteristics.”

“Studies to evaluate real-world vaccine efficacy in response to P.1 are urgently needed,” it added.

The researchers also found that infections were 10 to 80 per cent more likely to result in death in Manaus after the emergence of P.1. However, the authors cautioned that it was not possible to determine whether this meant the variant was more lethal or whether it was a result of increased strain on the city’s healthcare system, or a combination of both. 

The P.1 variant has over 17 mutations, which alter its genetic sequence from the virus originally identified in Wuhan, including 3 key changes to the spike protein that it uses to enter human cells.

Researchers in Brazil have been using genetic sequencing technology developed by Oxford Nanopore in the UK to identify and track the variant. The technology was first used in Brazil during the Zika outbreak in 2015.

Dr Leila Luheshi, director of applied and clinical markets at Oxford Nanopore, told the Financial Times that while the B.1.1.7 variant in the UK has similar properties of high transmissibility to P.1 — it is thought to be around 1.5 times as transmissible as variants that preceded it — there was no evidence to date that it evaded past natural immunity in the same way. Studies so far have also shown that current vaccines retain their efficacy against B.1.1.7.

Luheshi said that the concern with P.1 is that “because it has these mutations around the spike . . . the hypothesis is that the vaccine will be less effective.” But she added that there is not yet definitive evidence to support this theory. 



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