The Yuan Wants to Beat the Dollar in the Digital Field

China is half a step away from launching the digital yuan into mass circulation.

Beijing has long harboured plans to make the yuan a global currency. Formally, the Chinese monetary unit received this status five years ago, when the IMF Board of Directors voted for it. On October 1st 2016, the decision came into force, and since then the yuan has been included in the basket of currencies used to calculate the SDR rate (“special drawing rights”, a virtual currency unit issued by the IMF). In this basket, there were five currencies, and the yuan immediately took third place in terms of weight after the US dollar and the euro, ahead of the British pound and the Japanese yen. However, the yuan still has a very modest position in the global economy and international finance.

At the end of Q1 2020, the share of the Chinese yuan in the total foreign exchange reserves of all IMF member countries was only 2.02%, compared to 61.99% for the US dollar and 20.05% for the euro. And other currencies included in the SDR basket have more weight: the Japanese yen – 5.70%, the British pound – 4.43%.

The share of the yuan in the total volume of transactions that passed through the SWIFT international payment system in May 2018 was only 1.88%. Ahead were the US dollar (30.40%), the euro (34.19), the British pound (7.45), and the Japanese yen (3.54). And two years later, in May 2020, the share of the yuan even fell to 1.79%, and it fell from the 5th to 6th. Ahead of it were (the share of total payments through the SWIFT system: the US dollar – 40.88%; the euro – 32.91%; the British pound – 6.75%; the Japanese yen – 3.53%; the Swiss franc – 1.88%.

At the same time, China surpassed the US in terms of its share of global GDP, calculated using the purchasing power parity (PPP) of the yuan, and ranked 1st in the world back in 2014. According to the IMF, in 2019 the share of China in world GDP, calculated by PPP, was 19.25% and the share of the US was 15.11%.

Beijing has been preparing a serious monetary reform for several years, which, according to the plan of the party and state leadership of the People’s Republic of China, will solve a number of important socio-economic, monetary, and financial problems. We are talking about the introduction of an official digital currency – the digital yuan, which should be issued by the People’s Bank of China (PBC).

The topic of the official digital currency (the digital currency of the Central Bank – DCCB) is of concern to the monetary authorities of most countries of the world today. Several central banks are already preparing a central DCCB issue. Among them are the central banks of Sweden, South Korea, and China. Apparently, the US Federal Reserve has moved from a negative attitude to any digital currencies to a position of active support for the project of introducing the digital dollar. American monetary authorities have not only brought China and other countries out of their “digital hibernation” with their central DCCB projects, but also Mark Zuckerberg, the CEO of Facebook, who last year announced the launch of the Libra cryptocurrency and believes that it can replace traditional reserve currencies in international settlements.

China has moved farthest in preparing for the introduction of central DCCB. Within the country, the digital yuan should suppress attempts to use private cryptocurrencies such as bitcoin, and prevent the PBC from eroding its monopoly on money issuance. Externally, the digital yuan is needed to service foreign trade and exports of Chinese capital (as long as they rely on the preferential use of the US dollar). With the help of the digital yuan, Beijing hopes to de-dollarise the economy and foreign economic relations.

The task of emancipating China from the US dollar has become particularly urgent due to the fact that Washington started to impose economic sanctions against Beijing in connection with the events in Hong Kong. So far, the sanctions are expressed in the drawing up of blacklists of Chinese officials, but there is no guarantee that tomorrow Washington will not block payment and settlement operations of Chinese banks and companies through the SWIFT system.

For China, the time factor is very important in the implementation of the digital yuan project. Beijing is seeking to be the first in the world to introduce an official digital currency, transactions with which will be invisible to US financial intelligence. Beijing expects that the digital yuan will be in demand not only by Chinese residents, but also by non-residents who are under economic sanctions (Iran, Venezuela, North Korea, Cuba, Russia, etc.) or may fall under such sanctions (for example, European banks and companies that are afraid of secondary sanctions for cooperation with companies and banks of “rogue” states).

Research into the introduction of an official digital currency in China started in 2014. The emphasis was on the payment system, which should be created on the basis of a new currency. In English-language literature, this project is often referred to by the abbreviation DCEP (Digital Currency / Electronic Payment). If all dollar transactions are controlled by the Federal Reserve and Washington through the SWIFT, Fedwire, and CHIPS payment systems, then China’s task is to create a payment system in which transactions with the digital yuan are controlled by the People’s Bank of China and Beijing.

Much attention in this project is paid to blockchain technologies (a distributed registry of transaction protocols), which were originally used in private cryptocurrency projects (bitcoin, Ether, etc.). If in private projects, blockchain technologies serve the horizontal relations of all participants, guaranteeing them anonymity, then this technology should allow the Chinese Central Bank to see everything that happens in the world of the digital yuan in both vertical and horizontal dimensions.

The transition to a digital currency will dramatically strengthen the state’s position in the world of money. Banks for conducting transactions with the official digital currency will be unnecessary. Accounts for digital currency holders are opened at the Central Bank, and transactions between digital currency account holders will occur faster than before. And the possibility of embezzlement of money will be excluded. The huge control and evaluation infrastructure that has emerged around private banks will become unnecessary: rating agencies, audit firms, banking supervision, and financial monitoring.

A few years ago, Beijing prepared for the worst scenario in case the SWIFT system was blocked. The CIPS (Cross-Border Inter-Bank Payments System) international payment system was created, which includes 33 direct and 936 indirect participants and covers 96 countries. However, it did not become a fully-fledged alternative to SWIFT. Very little is known about the CIPS system; some believe that CIPS is a pilot project related to the DCEP project.

China, many experts say, is more ready to introduce an official digital currency than most other countries in the world, even the United States, Germany, France, and the United Kingdom. China has been implementing a technological development program for several years, which aims to make China a superpower in the field of advanced technologies by 2025. Robotics, artificial intelligence, and blockchain are some of the areas where Beijing wants to dominate.

And there is another reason why China may be ahead of other countries in introducing a central DCCB. The Chinese have become unaccustomed to cash. Electronic payments are commonplace for them. Not only in cities, but also in rural areas, residents almost do not use paper money, making payments using mobile phones through the payment systems Alipay or WeChat Pay. The PBC is not going to delay the abolition of cash. The PBC expressly states that the digital yuan is intended to replace the cash yuan. Glenn Woo, head of the Ledger Vault branch in the Asia-Pacific region, says that the Chinese will not even feel the replacement of the cash yuan with a digital one: “[F]rom the retail user’s perspective, [you] wouldn’t necessarily know what has changed — it’s going to be the same. They will still use WeChat, the super-app, to do a lot of different things — shopping, calling cabs, transferring money, and so on <…> It’s going to be seamless, no one is even going to know the difference.”

The secrecy stamp for research into the digital yuan was lifted on December 9th 2019, when the PBC disclosed details of pilot programs for testing the digital currency. Large-scale testing of the digital yuan started in April 2020. It involves four state-owned banks (the main one is the Agricultural Bank of China), as well as a number of large companies, including Huawei Corporation and telecommunications giants China Telecom, China Mobile, and China Unicom. In total, 22 companies are involved in the project. At this stage, the task is to develop mobile applications for storing digital yuan and SIM cards with built-in wallets for the new currency.

Testing of the new currency takes place at four sites: in Shenzhen (Guangdong province, southern China); in the Xiong’an new economic district (the center of the Beijing – Tianjin – Hebei industrial region, northern China); in Chengdu; in Suzhou (eastern Jiangsu province). Little is known about the details of the experiment. It is assumed that a number of commercial institutions and organisations that provide services will accept digital yuan from citizens in payment. In Xiangcheng, a district in the east of the city of Suzhou, the government has started paying public servants half of the transport subsidies in digital currency.

The next phase of testing is planned for 2022, during the Olympic games in China (mainly in Beijing). Foreign guests will be offered e-wallets with digital yuan and special SIM cards of Chinese Telecom operators. Candidates for the next round of tests may be Shanghai and the major cities of Hainan island, where significant amounts of foreign trade and capital are concentrated.

The head of the investment company Sino Global Capital, Matthew Graham, assesses the situation in the world of digital currencies as follows: America has almost no chance to become a pioneer in the introduction of a national digital currency. It will be China; it is already half a step away from launching the digital yuan into mass circulation.

Valentin Katasonov

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