This week, Shenzhen’s government announced the rollout of one of the largest real-world trials of China’s fledgling new digital currency. The announcement came at the same time that Xi Jinping visited Shenzhen, where he laid out the city’s role in upgrading China’s economy. CNBC’s Arjun Kharpal reported on the city’s distribution of 10 million RMB worth of China’s so-far unnamed central bank digital currency, otherwise known as ‘DC/EP’ (‘Digital Currency/Electronic Payment’):
Last week, the government in Shenzhen carried out a lottery to give away a total of 10 million yuan (about $1.5 million) worth of the digital currency. Nearly 2 million people applied and 50,000 people actually won.
The winners can now download a digital renminbi app to receive the digital yuan and spend it at over 3,000 merchants in a particular district of Shenzhen. The south China technology hub is home to some of the country’s biggest tech giants including Huawei and Tencent.
The lottery to give away digital currency was one of the largest distributions of the digital yuan to date. In April, the Wall Street Journal’s Jonathan Cheng reported that internal tests of the digital currency were being conducted in four cities, including Shenzhen, Suzhou, Chengdu, and Xiong’an. In the last two weeks, Chengdu also joined Shenzhen in expanding access to the digital currency to more of its residents.
China is not the only country exploring a digital currency, though it is the farthest along in developing one. Chinese officials saw the allure of a central bank-run digital currency early on, as consumers in China quickly adopted paying by mobile phone as a widespread practice.
For other countries, the desire to forge ahead with developing their own digital currencies has gained greater urgency amid the COVID-19 pandemic, as demand for cashless payment methods has grown. But digital currencies remain at the planning stage in most places. This month, several central banks, including the U.S. Federal Reserve, began hosting discussions and laying out core features for their digital currencies.
According to the South China Morning Post’s Frank Tang, for Beijing, the allure of a sovereign digital currency system is not just technological, but political:
China should accelerate its efforts to launch a sovereign digital currency, elevating it as an important part of an “independent” financial infrastructure in the digital era, a top Chinese central bank official has said.
The comments by Chen Yulu, deputy governor of the People’s Bank of China (PBOC), came months after the country’s top leadership introduced a new inward-facing economic strategy – dual circulation – to support future growth by relying more on domestic demand, and to better insulate itself amid rising geopolitical tensions, particularly with the United States. [Source]
The principle of “dual circulation” featured heavily in Xi Jinping’s Shenzhen speech last week. But the creation of a digital yuan will likely have effects well beyond China’s borders. In a report released this week, the Australian Strategic Policy Institute warned about the domestic and global ramifications of the digital yuan:
[DC/EP] has the potential to create the world’s largest centralised repository of financial transactions data and, while it may address some financial governance challenges, such as money laundering, it would also create unprecedented opportunities for surveillance. The initial impact of a successful DC/EP project will be primarily domestic, but little thought has been given to the longer term and global implications. DC/EP could be exported overseas via the digital wallets of Chinese tourists, students and businesspeople.
Over time, it is not far-fetched to speculate that the Chinese party-state will incentivise or even mandate that foreigners also use DC/EP for certain categories of cross-border RMB transactions as a condition of accessing the Chinese marketplace.
DC/EP intersects with China’s ambitions to shape global technological and financial standards, for example, through the promotion of RMB internationalisation and fintech standards-setting along sites of the Belt and Road Initiative (BRI). In the long term, therefore, a successful DC/EP could greatly expand the party-state’s ability to monitor and shape economic behaviour well beyond the borders of the People’s Republic of China (PRC). [Source]
A successful Chinese digital currency may ultimately reshape the global financial system. Deutsche Welle’s Kristie Pladson explained that in the long term, a widely used digital yuan may come to rival the U.S. dollar as the de facto global currency:
China may “hope to create its own international payment architecture, something comparable to SWIFT,” Badenheim said, referring to the code that helps financial institutions process transactions, “but which would be more centered on digital currencies and dominated not by the US dollar, but by the Chinese digital yuan.”
“I think that’s especially important in current times where we talk about the decoupling between the US and China,” he added.
Currently over 60% of known central bank foreign exchange reserves are in US dollars, according to the International Monetary Fund, making it the de facto global currency. Rather than attempt to settle transactions in different currencies, countries and companies use the dollar to streamline international payments. For comparison, the No. 2 global currency is the euro, which accounts for 20% of international reserves.
A widespread uptake of a digital yuan could lead to central banks similarly holding reserves of DCEP. As the sole issuer of DCEP, this would give the Chinese central bank greater influence over global financial markets. [Source]