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China may seek to raise the yuan’s stature via a digital avatar

China could become the first significant country to launch its currency in digital form, to get a better grip on the money in circulation and give the yuan a global reserve that could one day rival the US dollar. 

The People’s Bank of China tested the digital yuan in four major cities earlier this year. That was in part in preparation for the 2022 Winter Olympics in Beijing, Beijing News reported April 19. Such digital currencies issued by central banks, called CBDCs, will be fiat money, but in digital form. Unlike digital payments, they will be a store of value in themselves, which are representations of money. China’s CBDC would make the world’s second-biggest economy pioneer what experts believe may become a trend. “It would have meaningful implications on how monetary policies can [or] should be conducted in the future,” said David Wang, chief of China’s economy at Credit Suisse, in comments sent to S&P Global Market Intelligence. It will likely be the first digital currency officially introduced by an official monetary authority, Wang said. To take control Rather than bragging, the digital yuan will help the central bank partially regain control of the market’s cash. 

The Chinese mobile payments market is currently dominated by WeChat Pay from Alipay and Tencent, which means users deposit their money with these technology companies and thus withdraw money from the traditional banking system. PBOC Governor Yi Gang said last year that large technology companies “present us with many challenges and financial risks.” “China’s CBDC will allow traditional financial institutions, such as banks, to better compete with third party payment network providers such as Alipay or WeChat [that] account for over 90% of all mobile payment transactions in China,” said Galen Law-Kun of PriceWaterhouseCoopers’ cryptocurrency team. “The goal of China’s CBDC program is to replace paper cash and make peer-to-peer transactions more secure and efficient,” he said. 

By creating its digital currency, the PBOC can take over the underlying ownership of the digitally distributed money in the marketplace, even though users still use Alipay and WeChat pay as their primary e-wallets.

However, the central bank has not announced an official date to launch the digital currency. A Bank for International Settlements released in January said that 20% of the world’s central banks plan to launch their digital currency within the next six years. The coronavirus pandemic is likely to accelerate this development, the body of global central banks based in Basel, Switzerland, said in June. 

Not only will CBDCs eliminate hygiene problems through the use of contaminated cash, but digital currencies can also help governments distribute stimulus funds directly to businesses and individuals in a future crisis, they told S&P Global Market Intelligence. On August 13, the Federal Reserve announced that it was working with researchers from the Massachusetts Institute of Technology to test the impact of a CBDC on its operations. And in Europe, the development of CBDCs is underway in Switzerland, the U.K., France, and the Netherlands. The Chinese CBDC differentiates itself from other central banks worldwide because it is retail-oriented and aims to replace cash in circulation, known as M0, said Charles D’Haussy, director of ConsenSys, a blockchain software company.

“Most [other] central banks have been first focusing on wholesale CBDC and now are working on retail CBDCs.” Take the yuan internationally. China has long had ambitions to bring its currency to the international stage. While the yuan is still a long way off from becoming a challenger to the US dollar, a notable milestone in establishing the Chinese currency’s credibility came in 2016 when the IMF added the renminbi to its basket of Special Drawing Rights, an international monetary reserve. 

Which previously included only the US dollar, the euro, the Japanese yen, and the British pound. While it may only begin to be used domestically, many in the industry believe it could follow the national Belt and Road plan to become international, Law-Kun said. The Belt and Road initiative, China’s reimagining of the Silk Road, is seen by some experts as an avenue for China to enforce its use of the yuan at least regionally. “The BRI region is China’s natural region to succeed in building a multilateral currency order, to rival the 20th-century U.S.-dominated global monetary system,” said Shirley Ze Yu, a political economist, and researcher at the Ash Center at Harvard Kennedy School’s Ash Center. 

Opinions expressed by Market Daily contributors are their own.