The official app for China’s digital currency on cell phones with the yuan 100 yuan banknote. (October 16, 2020)
On the first anniversary of the launch of China’s digital yuan pilot, Beijing has decided to expand the pilot again. While China’s ambition to promote the internationalization of the yuan with the help of digital currencies is becoming more apparent, economic experts believe that no form of yuan can shake the international position of the U.S. dollar.
China was one of the first countries to conduct research on digital currencies. China’s central bank officially launched research on the digital yuan in 2014, launched a pilot of the digital yuan in four cities in April 2020 and recently expanded the pilot to more cities, including Beijing and Shanghai, to promote its use in areas such as retail, wholesale and cross-border payments.
China is also promoting the international use of the digital yuan. Officials from China’s central bank said Beijing plans to issue digital renminbi to athletes coming to China for spending during the 2022 Winter Olympics. China has also recently proposed a set of global rules for the central bank’s digital currency.
China has made no secret of its determination to use the digital yuan to challenge the U.S. dollar’s international standing. At the BIS Innovation Summit 2021 on March 25, Mu Changchun, director of the Institute of Digital Currency at China’s central bank, said the accelerated rollout of digital currency is to “protect its monetary sovereignty and fiat currency status” and said it wants to avoid the “dollarization” of digital currency. “.
Since World War II, the U.S. dollar has not had a serious rival as the world’s main reserve currency. But as China has recently accelerated its promotion of the digital renminbi, especially with Chinese official media trumpeting that the digital renminbi will replace the U.S. dollar, some analysts have begun to worry whether the dollar’s status will be threatened by the digital renminbi.
Economists point out that the digital yuan itself will not shake the U.S. dollar’s international standing, but it may push the yuan to be more readily available for international transactions, somewhat furthering China’s geopolitical goals.
Launching a challenge
For those countries willing to use the yuan, the digital renminbi is a more efficient way to transact with the currency. Over time, the rollout of the digital renminbi may contribute to efforts to internationalize the yuan.
Hung Tran, a senior fellow at the Atlantic Council and former executive director of the National Finance Institute, told Voice of America, “The digital renminbi will make payment transactions, including cross-border payments, more efficient and less costly than settling through numerous bank accounts and under the supervision and control of the People’s Bank of China.”
China has been trying to move away from a dollar-dominated payment system for years. Back in 2015, China launched the Cross-Border Interbank Payment System (CIPS) as an alternative to the U.S. dollar settlement system SWIFT, which conducts transactions without the knowledge of the United States.
Because of the ease of the digital yuan in international payments, the Chinese government could join with CIPS to create an international payment framework centered on the digital yuan to attract more countries to transact in yuan.
Countries under U.S. sanctions, such as Iran, Russia and Venezuela, will see the digital yuan as an alternative to the dollar-dominated payment system to mitigate the impact of U.S. sanctions on their economic activities, Hong Chuan said
The digital yuan also provides an insurance policy for China as U.S.-China tensions rise. The number of Chinese people and entities subject to U.S. sanctions is growing due to China’s human rights abuses in issues such as Xinjiang and Hong Kong.
The digital renminbi may also advance China’s geopolitical goals more broadly. The Chinese government could share its technical expertise to help other countries establish their own digital currencies and develop a digital currency network that is connected to the digital renminbi.
With an appropriate foundation of international payment facilities, China could incorporate the digital renminbi into various forms of economic activity, such as providing financial assistance to other countries in the form of the digital renminbi and incorporating the digital renminbi into cross-border payments and bilateral trade associated with the Belt and Road Initiative projects.
Is the U.S. lagging behind?
The U.S. has been more subdued than China’s aggressive promotion of the digital yuan. A joint project between the Boston Fed and the Massachusetts Institute of Technology to study the digital dollar is still in its early stages.
Fed Chairman Jerome Powell said at the International Conference on Settlements in March, “We don’t need to be hasty about central bank digital currencies, and the Fed doesn’t need to be the first central bank to launch a digital currency.”
The official U.S. bottom line is because the dominant position of the U.S. dollar is hard to underestimate. More than 60 percent of global reserves and more than 85 percent of foreign exchange transactions are now in U.S. dollars. By contrast, the yuan accounts for just 2 percent of both types of transactions.
Norbert Michel, director of the Center for Data Analysis at the Heritage Foundation, told Voice of America that the strong dollar is based on the strong political and economic position of the United States, which will not change with the introduction of the digital yuan.
The form of the currency itself doesn’t matter, especially because many international transactions are already electronic,” he said. The only way another national currency can weaken the power of U.S. sanctions is if other currencies are perceived to be more valuable than the dollar itself.”
Yaya J. Fanusie, a former CIA analyst and senior fellow at the Center for a New American Security, agrees, saying that global dollar clients consider the enormous influence of the United States in the global financial system.
If you provide financial services to them [the sanctioned], you will be cut off from dollar or correspondent banking services,” he said. You will lose your connection to most of the global financial system. That’s not going to change with new technology. There would have to be other major macroeconomic or geopolitical shifts for U.S. influence to be eclipsed.”
Indeed, the broader use of the digital yuan for cross-border transactions will be hampered by the same obstacles facing the internationalization of the yuan. For any currency to be truly global, its key characteristics boil down to credibility and convertibility. The Chinese government is still restricting capital flows in and out, and the Chinese central bank is still managing the yuan’s exchange rate, neither of which is likely to change significantly any time soon.
Joseph Gagnon, an economist at the Peterson Institute for International Economics, told Voice of America, “What matters is whether investors feel their investments in China are safe and well regulated, with no chance of being frozen or subject to any restrictions. China has a long way to go to convince investors that the digital yuan has no impact on that.”
The analysis points out that the U.S. is not without a base for using digital currencies, with credit cards, debit cards, online banking and various digital currencies widely used by the American public for transactions. While there are significant differences between digital currencies from central banks and those from commercial banks, on a practical level at retail, most Americans have access to and use digital currencies.
Experts say the use of a state-based digital currency would allow the country’s government access to a large amount of information, and Washington would need to be more careful than Beijing in developing a digital currency because of the issues involved, such as cybersecurity and user privacy.
Depending on their (China’s) precise design for a digital currency, it would be a boon to a government that wants to track and control what people spend,” Gagnon said. In other words, it will help any government with authoritarian tendencies increase their power.”
Recent Comments