China’s Digital Yuan: How will it Decide the Future of Money?
By Pamela Lin 20 MAY 202110-12 minutes
In China’s southern tech hub Shenzhen, 33-year-old reporter Sally Zhou got to test out what is said to be the next financial disruptor – a digital currency issued by the People’s Bank of China that could be accessed at her fingertips. In the second trial of China’s digital yuan held by the Shenzhen government in January 2021, Zhou was selected to receive a digital red packet worth RMB$200 through a lottery, with an exclusive link leading her to download the eCNY app.
Without needing a bank account, Zhou could choose a digital wallet from one of the six state-owned commercial banks on the app to store her eCNY. As part of the trial, she had to spend the digital currency at designated brick-and-mortar shops before the digital red packet expired. “I didn’t find it more convenient than the existing digital payment services such as Alipay, except the fact that I can pay without connecting to the internet,” Zhou said, “however, with the 5G network being commercialised, offline electronic payment is barely needed”.
Officially called Digital Currency Electronic Payment (DCEP), or more commonly referred to the digital yuan or eCNY, China’s digital yuan is a form of central bank digital currency (CBDC) issued by the PBOC that will be distributed to the public by the six largest state-owned commercial banks in China. In May 2021, Zhejiang E-Commerce Bank (MYBank), an Alibaba-backed online lender, became the first private bank to join the eCNY tests.
According to the Atlantic Council’s CBDC tracker, most economies are still in the stage of exploring the use cases, impact, and feasibility of CBDC, while 19 countries initiated small-scale testing of CBDC with a limited number of participants. Out of which, China and Sweden are among the first major economies to pilot a digital currency.
The PBOC has been working on its sovereign digital currency programme since 2014, and it was not until August 2020 when it launched pilot trials to a selected group of China Construction Bank account holders for retail payment in four cities including Shenzhen, Suzhou, Xiongan New Area, and Chengdu. In October 2020, the on-the-ground tests became public for the first time and were expanded to another six cities in China.
Although the official timetable of launching eCNY has not been released yet, it is expected that a wider launch to the public might take place at the 2022 Winter Olympics. At the Boao Forum this year, PBOC Deputy Governor Li Bo said China is trying to make eCNY available not only to domestic users, but also international users such as visitors at the Winter Olympics.
Implications on Global Trade
Currently, China’s digital currency is only used on a trial basis among a small group of users with a primary focus on domestic retail payment. Oliver Wyman’s report said China could promote the overseas use of the digital yuan with a rollout in the Greater Bay Area. The eCNY can also be used among countries participating in the Belt and Road Initiative (BRI) for payment, according to the report.
“It’s clear that some international trade, perhaps, between the US and China, may not want to use eCNY. But for countries participating in the BRI or the Regional Comprehensive Economic Partnership, the digital yuan may become a new standard as it can make the transaction easier, faster and cheaper,” said Richard Turrin, a fintech expert and the author of ‘Cashless: China’s Digital Currency Revolution’.
“The digital yuan is not just a currency. It should be seen as a digital ticket or entry token to China’s smart blockchain and AI-enabled logistics system,”
“The digital yuan is not just a currency. It should be seen as a digital ticket or entry token to China’s smart blockchain and AI-enabled logistics system,” said Turrin. It’s likely that using eCNY for cross-border trade will enable businesses to use China’s digital logistics networks to track the process from container loading to customs clearance, he added.
According to a PwC report about business implications of eCNY, China is expected to be the world’s first major economy that launches a digital currency, and the country can use the advantage to create a new global settlement system. (Photo: unsplash.com)
Recent moves by the PBOC also show that China is mulling to accelerate rolling out cross-border payment with the digital yuan. Bloomberg reported that the Hong Kong Monetary Authority is in talks with China to expand cross-border testing of the digital yuan after a successful first phase. The HKMA said it conducted technical tests with the PBOC’s Digital Currency Institute, and they are making the corresponding preparations for the next phase of technical testing, including the feasibility of expanding the use of eCNY for cross-border payments.
Zhu Jun, head of the PBOC’s International Department, recently published an article and pointed out the necessity for China to grasp first-mover advantages of eCNY and explore the potential areas to promote renminbi internationalisation. But the question is: Can the digital yuan help China to achieve its long-term goal of internationalising the Chinese currency?
Former Consul General of the US in Hong Kong and Macau Kurt Tong said in a recent Lynk Speaker Session that he doesn’t think eCNY could improve the attractiveness of the renminbi as a currency, and the internationalisation of the Chinese currency continues to depend primarily on the opening of China’s capital account to inward network transactions without limitation.
When asked about whether eCNY could threaten the status of the US dollar, Tong dismissed the possibility. “It can’t be just China wanting that to happen. And there’s other countries who only want that to happen if the US drives them out of the US dollar,” said Tong.
eCNY and the US Dollar
With eCNY gaining momentum in Mainland China, the Biden administration is reportedly monitoring the development of the digital yuan, with some officials expressing concerns that the move could kick off a long-term bid to topple the US dollar as the world’s dominant reserve currency.
“Recent developments have shown that eCNY is on the way to becoming an international currency,” said Herbert Poenisch, senior research fellow at the Academy for Internet Finance of Zhejiang University.
In February 2021, the Digital Currency Institute of the PBOC and the Central Bank of the United Arab Emirates joined the Multiple CBDC Bridge, a cross-border payments project in partnership with the BIS Innovation Hub, the HKMA and the Bank of Thailand.
“The project will be linked between the wholesale CBDCs of these participants with standard messages from ISO 20022, proof-of-work, and PvP settlements. Once set up, payments for oil shipments from the Gulf could undermine the USD,” said Poenisch.
In addition, borrowing under the Chiang Mai Initiative, a multilateral currency swap arrangement among the ten members of the Association of Southeast Asian Nations, can now be executed in the participants’ currencies, including eCNY, Poenisch added.
Turrin expressed that the US is not worried or frightened about the digital yuan as the US dollar is still the leading currency to pay for international trade. “But they are concerned about eCNY diminishing the US dollar use, especially between third party countries such as trade between China and Indonesia, Thailand, and Kenya,” he said.
“The advantages of eCNY, such as no fees and offline usage in addition to being the actual means of settlement rather than commercial bank money, could seriously challenge local payment service providers in the medium term,” said Poenisch.
Mu Changchun, director of the Digital Currency Research Institute at the PBOC, said in March that eCNY will coexist with Alipay and Wechat Pay, and it will serve as a backup or redundancy for the retail payment system in case of a system malfunction.
the success of the central bank digital currency is very much tied to the ability to use the digital yuan on Alipay and Wechat Pay wallets,
“In fact, the success of the central bank digital currency is very much tied to the ability to use the digital yuan on Alipay and Wechat Pay wallets,” said Turrin. “It’s not a vendetta against Wechat Pay and Alipay,” he added.
According to Xinhua, the PBOC has signed a strategic cooperation agreement with Ant Group to help build a technical platform for the digital yuan with OceanBase, Alibaba’s proprietary distributed relational database, and Alibaba Cloud.
“However, in the long term, the digital yuan will cost the two private payment providers to a certain degree, as the revenue from payments over time will be diminished. But it is not a disaster for these companies,” added Turrin.
After MYBank joined eCNY trials, some users of Alipay can now find a “digital yuan” option in the app to make payments using eCNY in Alibaba’s Tmall supermarket, Hema grocery stores, and for ele.me online food delivery service. (Photo: unsplash.com)
While China says its digital currency has the highest degree of privacy protection among existing payment tools and dismisses concerns of user privacy infringement, the public is still worried as the government will have direct access to transaction details.
“The bank that distributes the digital currency may not see the transaction data, but it is true that the PBOC has access,” said Turrin. But he thinks the public should not be too worried about the use of CBDCs. “Even in the networks of China’s commercial banks, they have separate systems. One system that processes the transactions; and another system that pairs users with transactions. It’s not as though the PBOC will have immediate access to the details of everything that you bought. They have to have a real reason to go in and search for that,” he explained.
Poenisch believes that the digital yuan will allow the government to monitor the spending habits of people, and sooner or later, control private spending potentially as part of the social credit system.
“While the legitimate monitoring to verify the legality of transactions is justified, over time this can be expanded to control people’s spending, rewarded or punished with social credit points to actually forbid certain transactions. The Chinese ‘controllable anonymity’ allows this whereas privacy concerns of other CBDCs would not permit this,” Poenisch added.
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