ICYMI: China’s Digital Yuan

3 min read.

What is Chinese Digital Yuan?

More than five years in the making, an official Chinese digital yuan is now in pilot runs to slowly replace the physical legal tender. China is the first country to launch a central bank digital currency (CBDC) or digital currency electronic payment (DCEP). The digital currency is expected to launch later this year or in early 2021, but no specific time frame has been announced. 

The proposed stable coin promises to hold its value against a basket of major official currencies, unlike the inevitable volatility value of Bitcoin and cryptocurrencies. It is an exciting time as central banks around the world have accelerated interest in introducing their own digital currencies; especially after Facebook announced plans to launch the stable coin Libra. Now that the idea of having a digital currency is becoming more “acceptable”, it is benefiting China as it is already a frontrunner in the development of CBDC. At this rate, digital yuan will most likely be on a faster trajectory to its official launch.

How the digital yuan appears on the e-wallet.
Photo Credit: Ledger Insights

Why Digital Yuan?

There is a simple explanation to why China wants to proceed with digital yuan. According to Bloomberg, China’s cash intensity has been dipping throughout the years and gone below 5 percent as people prefer to use payment apps on mobile. The annual spikes happened during Lunar New Year celebrations.


China’s cash intensity measured as a ratio of currency in circulation to broad money has gone below 5 per cent.
Photo Credit: Bloomberg

Chinese consumers are so far ahead in the adoption curve that they have embraced mobile payment apps, beyond both computers and credit cards. The change in consumption payment behavior has its downside — the accumulation of risks in opaque shadow banking. This is where the digital yuan can restore the missing balance when pushed out to consumers via banks. DBS Group Holdings Ltd’s economist Nathan Chow states that digital yuan will help to regulate an overstretched debt market more effectively. 

Pilot Program Trials

Pyments.com reported that the People’s Bank of China (PBOC) launched a pilot program in April to trial the new digital currency with 19 local businesses, including American chains Starbucks, Subway and McDonald’s.

The digital currency trial was held in Xiong’an New Area, a satellite city of Beijing, and included coffee shops, fast food, retailers, theaters and bookstores. Ledger Insights revealed that news of the digital yuan pilots first emerged late last year. The organizations involved are the big four state-owned banks, three big telecoms firms and Huawei: Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China, Bank of China, China Telecom, China Mobile and China Unicom. Representatives from Tencent and Alipay also attended a recent promotional event on digital currency trial organized by the National Development and Reform Commission. 

According to media reports, half the May transport subsidy for Suzhou municipal employees will be in the form of DCEP. Further tests will be done in Shenzhen and Chengdu and ahead of the 2022 Winter Olympics in Beijing  — they would also include transport, education, medical care and retail.

Adoption

Thanks to Alipay and WeChat Pay, the adoption of digital yuan in China should be an easier process; Bloomberg stated that 80 percent of Chinese smartphone users are already utilizing their mobiles to make payments. The adoption could be faster now as well because of people’s fear of catching Covid-19 infection from handling cash. 

On top of that, in this new system, a low-value transaction can go through even if both parties are offline. As this is sovereign liability, it is safe if an intermediary goes bankrupt. Is China the only runner in this space? The answer is no — major countries are also reviewing the potential of CBDCs. Cointelegraph pointed out that the Bank of Canada posted a job opening titled “Project Manager, CBDC,” signifying that Canada too is stepping into the space of central bank digital currencies. Banque de France also successfully tested a digital euro in May 2020. The Bank of Thailand has also launched a project to pilot test its CBDC payment system with the largest building material provider in the country. 

86insider’s Take

With the introduction of digital yuan, the anonymity of cash will no longer exist. This will deter businesses from mishandling funds as authorities can look into transactions for unwanted activities. Since the exchange of digital yuan between customers and merchants will pop up on a centralized ledger and go through a quicker process than in Bitcoin-style setups, the ease of adopting the digital yuan may eventually come to dominate business transactions. 

Let’s not forget that the digital yuan could find its way to customers overseas. This would mean hefty bank fees for business-to-business international transfers market can be avoided; especially in locations where China’s belt-and-road initiatives are actively taking place. 

Will the digital yuan challenge the US dollar? There is a potential with the internationalization of the currency. Foreign companies operating in China might turn into international carriers of yuan. It might take a while and a good fight but do not underestimate the possibility of it happening.