Will a stronger digital currency lead to a weaker pataca?
Macau Business | July 2023 | Special Report | Pataca, 170 years on – Quo vadis?
With the conclusion of the discussion on the “Legal Regime for the Establishment and Issuance of Currency” by Macau’s Legislative Assembly’s (AL) second standing committee, the path is now cleared for the potential adoption of digital currency. The bill is ready to undergo its second reading and be published in the Official Gazette.
However, this does not mean that digital currencies, mainly digital renminbi (the Chinese central bank digital currency), will immediately become a part of Macau’s daily life. The bill does provide for legal digital currencies, but as Chan Chak Mo, the chairman of the second standing committee, explained last May, “the application will be further explored in light of the government’s overall planning policies and social development needs.”
“I do not foresee the adoption of digital Renminbi happening overnight. Currently, the central bank digital currency is still undergoing a testing phase in some regions on the mainland. While Macau visitors can use the currency in the mainland, cross-border use in regions like the Hengqin cooperation zone has only recently been documented, let alone the use in Macau,” said Florence Lei from the Faculty of Business and Law at the University of Saint Joseph, in an interview with Macau Business.
Her colleague at the University of Macau’s Faculty of Social Sciences, Yubo Tao, goes even further: “The adoption of digital RMB in Macau is a complex issue that involves various factors, including the legal framework, technical infrastructure, market demand, and policy coordination between Macau and mainland China.”
This implies that the approval of the bill is merely the easier aspect, as several other considerations must be taken into account.
The Professor of Economics explains: “I think the adoption of the digital RMB in Macau is a possibility that should be carefully studied and evaluated by all stakeholders. It could be sooner than later if there is a strong political will and a clear roadmap from both sides. However, it could also be delayed or complicated by various technical, legal, or social factors. I hope that Macau and mainland China can work together to find a solution that is mutually beneficial and respectful of Macau’s unique status and characteristics.”
Alex Zhou, from the Faculty of Business Administration at the University of Macau, notes that “the digital RMB will have a significant global influence”, but one still needs some time to see the impact.
“There are at least two reasons why the virtual yuan could shift away from the pataca. First, both MOP and HKD are pegged to the US dollar. The main motivation for virtual RMB is to de-dollarize, which reduces the USD’s dominant role in the global financial system. Secondly, Macau’s economy is still heavily reliant on tourism and the gaming industry. The digital RMB could bring uncertainty on tourists valuing financial privacy,” explains the Professor in Finance.
Despite these setbacks, Professor Zhou also sees “more opportunities.”
Firstly, he says, the digital RMB could potentially make it easier for individuals and businesses “who don’t have access to traditional banking services to participate in the financial system. This could create job opportunities in financial services and international trade.”
Secondly, “cross-border payments could become easier, benefiting Macau as an offshore RMB centre.” Professor Zhou quotes recent Bloomberg news saying Yuan just overtook US dollars as the most-used currency in China’s cross-border transactions for the first time in history.
“Finally, the increased RMB transactions could help the diversification of reserve assets for Macau, which leads to stronger macro-prudential policies to curb the global financial cycle,” Alex Zhou concluded.
Macau Business also asked Professor Tao to develop the question of the impacts of the adoption of digital currencies on the daily use of pataca.
“The impact of the adoption of the digital RMB on the daily use of the pataca depends on several factors, such as the degree of integration, the exchange rate mechanism, and the public preference,” he stated.
“It is hard to predict the exact outcome, but I think it is more probable that the digital RMB could coexist with the pataca as a parallel currency, similar to how the RMB and the HKD are currently used in Macau. This is because the digital RMB is not a new currency, but a digital form of the existing renminbi that is issued and regulated by the People’s Bank of China,” explained the co-author of a recent research paper called “Trend-based Forecast of Cryptocurrency Returns“. “It is designed to facilitate transactions and payments in a more convenient, secure, and efficient way. It is not intended to replace cash or other forms of payment, but to complement them.”
However, even though “the adoption of digital RMB would not change much for the daily use of the pataca,” Professor Tao foresees “some problems for the coordination and regulation of money and finance between Macau and mainland China. It could also increase competition and confusion among different payment options, such as WeChat Pay, Alipay, mPay, and cash. Since digital payments are widely accepted in Macau, tourists from the mainland may prefer to use RMB or HKD via WeChat Pay or Alipay, while locals and foreign workers who receive salary in MOP may prefer to use pataca to avoid exchange transaction costs. Given that tourism is another main pillar for the Macau’s economy, it is important for Macau to evaluate the willingness of tourists from mainland to use digital RMB for transactions.”
To reduce these impacts on the daily use of the pataca Professor Yubo Tao concludes with an expectation. “I hope that Macau and mainland China can find a solution that respects Macau’s unique status and characteristics while enhancing their economic cooperation and development.”
“I hope that Macau and mainland China can work together to find a solution that is mutually beneficial and respectful of Macau’s unique status and characteristics” – Yubo Tao
Another view, from Professor Florence Lei: “The circulation of other currencies in parallel to the pataca has been a reality of Macau. As long as the mainland remains the largest trading partner of Macau, the Renminbi will be significant or in other words, the pataca in circulation will lessen relatively. This juxtaposition exists whether or not the Renminbi is digitalized or not. The launch of digital Renminbi, with the help of fintech, only accelerates the existing processes.”
On this particular topic, the Chair Professor of the School of Business, Macau University of Science and Technology, Jacky So, anticipates that “Digital Yuan will be more popular in the near future given the Chinese policy to internationalise the RMB. However, since RMB is still not 100 per cent convertible, pataca will play an important role” as it is comparatively more convertible.
Professor So ends his approach with a quote from the Chairman of the Macau Monetary Authority, Benjamin Chan, several years ago: “RMB and pataca will complement each other, not ‘substitute’.”
“The trial periods are necessary and reasonable steps”
Since receiving approval from the State Council in 2017, the People’s Bank of China (PBOC) “has been working with various partners, such as commercial banks and technology firms, to develop and test the digital RMB system,” comments Professor Yubo Tao.
The first trial launch was in 2020 in four cities, and it has been expanded to more than 20 cities and regions as of April 2022. The PBOC has also conducted cross-border trials with Hong Kong and other countries and tried to use the digital RMB at major events such as the 2022 Winter Olympics and the 2022 Asian Games.
“All these trials are not only aimed at testing the technical functionality of the digital RMB system, but also at collecting feedback from users, merchants, regulators, and other stakeholders. The trials also help to educate the public about the features and benefits of the digital RMB, and to promote its acceptance and adoption. The PBOC has stated that it will launch the digital RMB when it is ready, without setting a specific deadline or timetable, ” the co-author of a recent research paper called “Trend-based Forecast of Cryptocurrency Returns“.
Even though it’s been 3 years since the beginning of the trial period, Professor Tao refuses to classify it as hesitant: “The creation process of the digital RMB is a pioneering and ambitious project that reflects China’s vision and innovation in the field of digital currency. It is not fair to say that China is hesitant, as the trial periods are necessary and reasonable steps to ensure the quality, security, and stability of the digital RMB system.”
“Therefore, I think the creation process of the digital RMB is a complex and challenging endeavour that requires careful planning, testing, and evaluation. It is not a sign of hesitation, but of prudence and responsibility. China is leading the world in developing a central bank digital currency that could have significant implications for its economy and society. I believe that China will launch the digital RMB when it is confident that it can meet its goals and expectations,” the Professor of Economics, Faculty of Social Sciences, University of Macau, adds.
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