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China aims for Olympic gold with its digital currency

Among the many benefits China planned to host the 2022 Winter Olympics, one of the biggest and most subtle was the boost it would give its digital currency.

The Games would show China’s mastery of financial innovation, accelerate the move towards a cashless society and, at their most ambitious, undermine the position of the US dollar as the world’s reserve currency. These plans have been undermined by the COVID-19 pandemic, which has limited the number of visitors to the Games, but ambition and vision are essential.

Governments have been studying digital currencies for more than a decade, driven by the digitization of money and the growing number of private companies mediating financial transactions. Interest from central reserve banks in central bank digital currencies (CBDCs) intensified and development accelerated after Facebook announced in 2019 the launch of Libra, its own digital currency. (Facebook announced last month that it was scrapping that project, now called Diem, due to regulatory hurdles.)

These efforts are driven by traditional central bank concerns. There is, for example, the desire to increase the efficiency of the financial system: the circulation of real coins and notes is expensive and time-consuming. They also want to ensure access to financial services, as hundreds of millions of people around the world do not have bank accounts, but a large percentage of them have mobile phones, which can be used for digital currencies. . They also want to prevent bad actors from financing their activities.

The main concern of central bankers is the stability of the national financial system. The digital age has introduced a new threat vector as private actors are responsible for a large and ever-increasing share of business transactions. The insolvency or misbehavior of these companies could bring down an economy. This is a key distinction between a CBDC and a cryptocurrency – one is backed by the full faith and credit of the government; the other is a speculative investment.

According to a January 2021 survey by the Bank for International Settlements, 86% of 65 central banks were actively engaged in some form of CBDC work and nearly 60% said it was “likely” or “possible” that they would issue a CBDC for retail use over the next six years, nearly tripling the 20% of the previous year’s survey. In the 2020 survey, 90% of countries willing to get started were emerging economies. Cambodia and the Bahamas have launched a CBDC and a few others have pilot projects underway.

China has been studying digital currencies since 2014. Within three years, the Chinese central bank was working with commercial institutions to test a currency, and by the end of 2019, digital currency electronic payment (DCEP, unofficially the e-yuan or e-CNY) has been launched. in several places across China. In these pilot projects, the government distributed 34.5 billion Chinese yuan ($5.34 billion) to more than 20.8 million people. With over 3.5 million organizations and businesses, they use an app (sometimes called a wallet) on their phone to transact. The currency has been used for almost 71 million payments in more than 1.32 million scenarios, which range from retail exchanges, payments for public transport, utility bills or government services.

DCEP transactions reached $8.37 billion in the second half of 2021 and the app was downloaded by 261 million people, or nearly 20% of China’s population. While an impressive start, these numbers pale in comparison to private payment apps like Alipay or WeChat Pay, which serve over 800 million people in China, or 86% of mobile internet users. . And users use the app a lot: Alipay processed $1.6 trillion in payments on average per month in 2020.

China’s promotion of the DCEP reflects the usual motivations and a few others. Mitsui Global Strategies estimates that 120 million people in China do not have access to bank accounts; the government wants to correct that. There are hidden pools of debt throughout the Chinese economy and a digital currency could allow for better financial management and transparency. Data from digital currency transactions would also provide unparalleled insight into spending patterns and facilitate more efficient management of the economy.

The share of the private sector in financial intermediation also worries Beijing. In addition to concerns about stability, the Chinese government is worried about a company gaining power and influence that could rival its own. Or, as one analysis concluded, e-yuan allows the Chinese government to rework “the terms of economic and political power with Chinese tech giants.” The CNAS, a US think tank, warns that the DCEP offers control over the marketplace and, by extension, over citizens’ financial data – the goal of any authoritarian government.

The international dimensions of the e-yuan are just as important for Beijing. China recognizes that the internationalization of its currency is a key indicator of global status and power. Beijing knows that American power – and its ability to inflict pain on China – is a function of the dollar’s status as the world’s reserve currency. China wants to blunt Washington’s most powerful weapon.

It’s progressing. Just over ten years ago, China settled almost none of its trade in yuan; in 2019, 13.4% of trade in goods and 23.8% of trade in services was paid in Chinese currency, reaching nearly 20 trillion Chinese yuan. The result, reports Charles Gave of Gavekal Research, is the emergence of the “new Asian monetary order”, with China’s trade with Asian and African countries increasingly priced in yuan.

However, the yuan represents only 2.5% of the world’s foreign exchange reserves, while the dollar represents 59.5%. The dollar remains predominant, but its lead is eroding.

China’s problem is the Beijing government’s ambivalence about loosening its grip on the currency to actively promote a global yuan. The last time China attempted real liberalization, it was forced to back down after $1 trillion left the country in a matter of months. The DCEP might allay some of those concerns.

The currency would facilitate cross-border payments for Chinese businesses, a market that is growing rapidly alongside the Belt and Road Initiative. Once these countries become familiar with international trade using the DCEP, they could use it internally, similar to how some countries use the greenback. Acceptance would facilitate investment in Chinese bonds and securities and allow commodities to be denominated in yuan, eliminating currency risk and exposure to US authorities through the use of dollars.

An article in China Finance, a magazine published by the PBOC, called the race to develop a CBDC a “new battleground” in the strategic competition between nations. The Mitsui report quotes a Japanese banker who argued that China is not aiming to displace the United States or internationalize the yuan, but rather wants to set global CBDC standards in technology and mechanisms. This is in line with President Xi Jinping’s call for China to “actively participate in formulating international rules on digital currency and digital tax to create new competitive advantages”, and his exhortation from the Group of 20″ to discuss the development of standards and principles for digital central banking”. currencies”.

China was the first to add digital currency-related content to the ISO 20022 repository, a global standard covering information transferred between financial institutions that includes payment transactions, securities trading and settlement, and card data credit and debit. The PBOC has also started working with the central bankers of Hong Kong, Thailand and the United Arab Emirates to create a digital ledger that would facilitate multi-currency cross-border payments.

This is all behind Beijing’s push to make the 2022 Winter Olympics another DCEP pilot. Games participants received gloves and smartwatches with integrated payment functions to facilitate the use of e-yuan. The Organizing Committee has urged businesses and Olympic sponsors to accept e-yuan during the Olympics, joining cash and Visa cards (an official sponsor of the Games) as payment options in the Olympic Village.

Not all governments are as enthusiastic as China. A recent report from the UK House of Lords called CBDCs “a solution in search of a problem.” And while the US Federal Reserve, the Bank of England and the European Central Bank have joined an international effort to discuss common principles and key characteristics of a CBDC and its supporting infrastructure, all are monitoring developments ahead. to take further action.

Japan has joined the international study, but the Bank of Japan is not committed to a digital currency, although it has “launched an experiment for a general-purpose CBDC”, the second phase of which will begin this spring. Unlike other countries, the demand for cash continues to grow here, which undermines some of the rationale for a CBDC, although Japan will need to have a system in place if other countries adopt digital currencies. Otherwise, it will be pushed to the periphery of the global financial order. These are the stakes as China continues its drive to develop its digital currency.

Brad Glosserman is Associate Director and Visiting Professor at Tama University’s Center for Rule-Making Strategies and Senior Advisor (non-resident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019).

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