Thailand currency

China’s digital renminbi is not a fast track to currency internationalization

Author: Haihong Gao, Chinese Academy of Social Sciences

China is one of the first countries to develop a central bank digital currency. The People’s Bank of China (PBOC) first proposed the idea of ​​a digital renminbi in 2014. Since then, significant progress has been made on the concept, and the development of the digital renminbi has caught the world’s attention. whole. A frequently debated question is whether the digital renminbi will serve as a new channel for the internationalization of the renminbi.

Some believe that the digital renminbi is the best way to challenge the hegemony of the US dollar, as it is built on entirely new payment rails with new technologies and standards. The development of the digital renminbi could also leverage China’s growing financial influence to replace the dollar with Chinese technology.

Concerns about the digital renminbi challenging the dollar’s hegemonic position are overblown. The digital currency is primarily designed for domestic retail transactions and is still in its testing phase. The PBOC has tested cross-border use of the digital renminbi, but only limited to the 2022 Beijing Winter Olympics.

There is currently no direct link between the digital renminbi and the internationalization of the renminbi, but it has the potential to facilitate cross-border payments.

The steps taken by the PBOC to develop the digital renminbi are a response to digital transformation and the rapid growth of private digital platforms. The PBOC intends to increase market competition by providing its own digital currency, which will improve the efficiency and security of the payment system, facilitate faster payments and reduce transaction costs. In principle, the digital renminbi is an open, inclusive and innovative exchange service system. By the end of June 2021, the PBOC had launched digital renminbi pilot projects in major cities, testing more than 1.32 million scenarios such as transportation, shopping, dining and utilities. Domestic consumers also appreciated the Lunar New Year “red packets” in digital renminbi in February 2022.

The main obstacle to the renminbi’s internationalization is its limited convertibility and financial openness. Over the past decades, China has made efforts to liberalize its capital account, implemented a new strategy of openness, and encouraged two-way cross-border financial flows despite uncertainties regarding US decoupling. But compared to advanced economies, China is still not as financially open. Access to the renminbi is hampered by the fact that full convertibility only exists in a number of trade or special economic zones in China. While digital payments can speed up financial transactions, they cannot make capital flows freer.

A digital renminbi can certainly facilitate currency payments. For example, it makes direct trade easier and cheaper since China and its trading partners can use their own currencies rather than a third currency. But that doesn’t change the game yet. Cross-border payments still face challenges – such as monetary sovereignty and regulatory requirements – and pose challenges for monetary authorities in managing cross-border capital flows. Increasing the willingness of foreign users to adopt a new digital currency is even more difficult because such a decision goes beyond economic justifications for factors such as trust and data protection.

China’s growing share of the global economy will promote greater use of the renminbi. The use of the digital renminbi is unlikely to pose any more threat to the dollar’s international dominance than current forms of the renminbi in the short to medium term. The dollar’s status as an international currency has been bolstered by the unprecedented liquidity, depth, and strength of the U.S. financial system, capital markets, strong institutions, and strong property rights. A digital renminbi will not undermine these conditions, especially since COVID-19 has boosted the status of the dollar and shown that there are few alternatives as a safe haven currency.

As the digital renminbi is still a work in progress, it may be too early to rule out the possibility of increased cross-border payments. In its latest annual report on the digital renminbi, the PBOC said there would be more cross-border usage testing based on national practices and international demand, in line with the principles of conformity, interoperability and lack of disturbance.

It is also a logical move if the PBOC, as a leader in central bank digital currency, is willing to participate and take the lead in setting standards and a regulatory framework in this area. . But the PBOC is aware that such attempts can only be accomplished in collaboration with other central banks, monetary authorities and international financial institutions.

PBOC joined the Multiple Central Bank Digital Currency Bridge with the Central Bank of the United Arab Emirates, Bank of Thailand and Hong Kong Monetary Authority, and participated in the BIS Innovation Hub to explore proof of concept and prototypes to to facilitate cross-border payments in foreign currencies. These efforts are a good start for building future payment systems and underscore the importance of international cooperation in achieving such ambitions.

Haihong Gao is a professor and director of the International Finance Research Center at the Institute of Global Economics and Politics, Chinese Academy of Social Sciences.