Even though China’s digital yuan will be beneficial in many different ways,
one of the areas where it can bring more value is that of promoting the use of
the yuan for cross-border payments, by trying to convert some of the
US-dollar-denominated international trade transactions into renminbi-denominated
ones, thus trying to challenge the dominance of the US dollar in international
trade and finance.
This
will not happen overnight, but, if there is enough penetration and acceptance of the
digital renminbi in a separate jurisdiction or region, it is conceivable that a
trade and finance system parallel to the USD-system can gain critical mass, a
system that can allow certain countries to bypass the global banking system and
U.S. sanctions.
Indeed, there were high hopes for the renminbi´s (RMB)
internationalization in the early 2010s, but results to date have been mixed
and even slightly disappointing.
One the one hand, the RMB is among the top five most
used currencies in global payments according to SWIFT, up from the 35th
position in October 2010. The RMB rose to a record 3.2% of international
payment settlements in January 2022, breaking a record set in 2015.
On the other hand, though, if we analyze these numbers
in much more detail, we can see that the RMB has a long way to go before it can
challenge the USD, despite the IMF’s adding the Chinese national currency to
its special drawing rights (SDR) basket back in 2016 and despite the RMB
recently breaking the record set in 2015. According to SWIFT too, in October
the greenback was the top currency used in global payments with a 42.1% market
share, followed by the euro (34.4%), the British pound (7.85%), the Japanese
yen (2.96%) and then the RMB at 2.44%, its lowest point in a year.
However, as Spivak wrote, “One of the main reasons
for the yuan’s lack of progress is that it is not freely convertible. Instead,
the [PBOC] sets a daily reference rate for the yuan against the dollar, from
which trading via interbank currency markets cannot diverge by more than two
percent (…) Beijing may wish to promote the yuan’s greater
internationalization, but periodic crises have shown that a nonconvertible
currency makes it easier to control the impact of economic shocks on domestic
financial markets.”
Given that the greenback is currently responsible for
roughly 60 percent of global foreign exchange reserves, the Digital Yuan may be
the perfect tool for this distance to be reduced, especially thanks to initiatives
like the Belt and Road Initiative and RCEP.
Since the yuan is not yet fully convertible, this may
hinder the internationalization process of the digital yuan. However, if there
is enough penetration and acceptance of the digital renminbi in a separate
jurisdiction or region, it is conceivable that a trade and finance system
parallel to the USD-system can gain critical mass.
How well this will work in practice, though, still
remains a mystery, given that challenging the US dollar’s position in
international trade is definitely not easy, therefore any changes will not take
place overnight.
Following what I said before, what role can the Digital Yuan play in the
RMB internationalization?
China´s Digital Yuan, also known as DCEP, is a Central Bank Digital
Currency (CBDC). A CBDC is a new form of central bank money accessible to the
public, accepted as a means of payment, legal tender, safe store of value by
all citizens, businesses, and government agencies. The major economy leading the CBDC race in Asia
(and in the whole world) is China.
In early January 2022, the People’s Bank of China (PBOC) launched the
Digital Yuan wallet apps for Android and iOS.
The e-CNY presents many advantages such as promoting financial inclusion, no
interest, low cost, payment and settlement, controllable anonymity, security,
dual offline payment, etc. Furthermore, since mid-June, China’s digital yuan
can now be used for wealth management products and bank loans. This move by
China’s central bank extends the use of the digital currency beyond the
purchase of consumer goods. In addition, China Construction Bank Corporation
(CCB) now allows customers to use the e-CNY for wealth management products on
its mobile app.
To me, the Belt and Road Initiative area is the
best possible candidate area for China to start internationalizing its Digital
Yuan, or at least one of the best two candidates, alongside RCEP.
The Belt and Road Initiative (BRI) is currently
a key program for China, and, consequently, it is perfectly possible to imagine
how important the expansion of the digital yuan can become for China within the
Belt and Road.
This actually goes in line with that I mentioned in
some of my previous articles, where I said that Regional Comprehensive Economic
Partnership (RCEP), signed on November 15, 2020. Through the RCEP, China will
strengthen its trade ties with neighboring countries, and also be able to
leverage agreement to facilitate cross-border adoption of its digital yuan to
benefit consumers, dealers, bankers and industries across regions.
To sum up, there were high hopes for the renminbi´s
(RMB) internationalization in the early 2010s, but results to date have been
mixed or even slightly disappointing. However, the e-CNY may be able to boost
global wholesale use of the RMB, and the Belt and Road Initiative can be a perfect
platform to do so. While facilitating
cross-border adoption of the digital yuan, such economic exchanges in the same
way will help any of the other central bank digital currencies in Asia. As a
side note, Hong Kong can play a key role in helping the yuan to
internationalize, given its role as the world´s largest offshore RMB center,
given its One Country Two Systems principle and given its expertise in CBDCs as
proved by the digital yuan tests for cross-border payments and projects like
mBridge and the e-HKD.
The author is an influential voice in the FinTech area, having advised many FinTech companies and with a very extensive network across the globe. He holds an MBA and a doctorate in Hong Kong real estate law and economics. He is also a well-known international speaker on the areas of Central Bank Digital Currencies and Blockchain.
