The Chinese Communist Party is using the upcoming Beijing Winter Olympics to push for a digital yuan, a move experts believe is intended to marginalize the U.S. dollar-dominated global financial system and thus enhance the Communist Party’s strategic competitiveness globally. Experts point out that China’s financial technology is now ahead of the U.S. and that the U.S. should compete and win against the CCP with the innovative capabilities it excels at.
The official Chinese digital currency app on cell phones with the yuan 100 yuan banknote. (Oct. 16, 2020)
Status of digital yuan implementation
China has pressured a number of U.S. companies to install a system that allows consumers to pay for their products in digital yuan before the opening of the Winter Olympics in Beijing, the Financial Times reported last month, citing people familiar with the matter, with major U.S. companies such as McDonald’s, Nike and Visa among those pressured.
While China has not set a time frame for the official introduction of the digital yuan, more than 140 million people have downloaded wallet software that stores it and 10 million merchants are ready to accept the currency, according to the People’s Bank of China. Currently, 150 million digital yuan transactions worth nearly $10 billion have been recorded at card readers in stores, tax bureaus and subway stations.
So far, while some state-owned companies have used digital renminbi to pay employees, most of the digital renminbi used in the experiment is actually money given away by central banks and government agencies, and there is not a great deal of evidence that people are clamoring to use it.
An October McKinsey report noted that the digital yuan is an example of a currency issued by China’s central bank that is “only moderately accepted. The McKinsey report said that while trials have shown that the digital yuan does work, it is still small compared to the more than 2 billion monthly active users reported by WeChat Pay and Alipay.
Digital yuan seeks to undermine the dollar’s international currency status
According to David Wertime, executive director of the China section of technology media outlet Protocol, there are four conditions for China to issue a digital yuan: One, China’s state-owned banking system is very conservative and customer-unfriendly, making it largely difficult for small and medium-sized enterprises to get loans from there. Two, China does not have FICO, the U.S. credit scoring system, and while the People’s Bank of China has a system, it is terrible, which means there needs to be another way to assess the credit of individuals and businesses. Third, smartphones are now very common in China and can be connected to the Chinese Internet or Intranet. Fourth, there is a lot of cash in China that is looking for a use.
“So (China) has all the makings of a fintech environment that can outperform the U.S., which has more developed but older financial hardware. The Beijing government wants to use this to stimulate consumer spending, increase its power and visibility and perhaps begin to marginalize the global financial system, which is dominated by the U.S. dollar.” Voltairem said.
Lu Xiaomeng, director of geo-technology at Eurasia Group, believes there are many motives behind Beijing’s push for a digital yuan. But the main one is to enhance China’s global competitiveness.
“There is a group of Chinese academics and some former bankers who believe that the introduction of a central bank digital currency in major global economies is inevitable and that this financial instrument will play a very big role in international economic competition and digital commerce. They therefore see the digital renminbi as a good way to maintain China’s monetary sovereignty and financial security and to enhance China’s strategic competitiveness globally.”
While the U.S. dollar is still the common currency of payment for international financial activities, Rebecca Liao, co-founder and executive vice president of blockchain project SKUChain, said China has begun to pressure its trading partners in Asia to “strongly recommend or force” them to use the yuan for payments And people are finding it more convenient, though slightly more expensive, to make such payments than to use U.S. dollars,” Rebecca Liao said.
Rebecca Liao said, “Cross-border payments in U.S. dollars are still very difficult, especially in Asia. As a result, China has found that a lot of new technology adoption is not necessarily because of cost initially, but because of convenience.”
Rebecca Liao said China has begun to expand on this idea not only through cross-border payments with its Asian partners, but also by requiring the Regional Comprehensive Economic Partnership Agreement to use the digital renminbi as the base currency. If the agreement adopts this provision, then clearly it would be a big win for the digital yuan overseas.
“(China is aiming) to achieve its geopolitical goal of consolidating its financial security position, as well as weakening the global economic infrastructure hitherto dominated by U.S. interests. Ultimately, in terms of the dollar’s status as a reserve currency, they are focused on overseas markets and the offshore financial services that China currently provides,” Rebecca Liao said.
Digital currency has the potential to change the way governments track and manage their economies; it could provide financial services to the world’s poor and shake up banks, foreign exchange markets and cryptocurrencies in the process. The Bank for International Settlements said most currency authorities are considering similar initiatives, but none are testing official currencies like China. The U.S. has yet to take a clear position on the issue.
How the U.S. is responding
Rebecca Liao said China’s fintech is now ahead of the U.S., but the U.S. response should not be to reject Chinese products or restrict China, but to “compete with it and win.”
She said, “I think the right way to do that is to foster innovation in a way that the U.S. is very good at.” She hopes U.S. policymakers will engage with innovators in the fintech sector to understand the fintech trends that are leading economic growth and energy.
According to Lu, the U.S. should not just focus on China, but should look at other countries.
“If you look at what the rest of the world is doing, there are a variety of countries, like Singapore, Hong Kong, more conservative regulators, like Japan’s and South Korea, who are taking some regulatory steps as well as some ways to promote innovation in the space.”
Digital yuan raises personal privacy concerns
As China ramps up the rollout of the digital yuan, there are concerns that the government will track every transaction, not only by Chinese people but also by foreign companies in China, potentially eroding personal privacy while increasing personal convenience.
People already worry about big tech companies collecting their personal information and making money with it when they use digital payment platforms.
Michael Cunningham, a visiting scholar at the Heritage Foundation’s Center for Asian Studies, a U.S. think tank, has spent a long time working and studying in China. He said of his experience using digital payment platforms in China, “Actually one of the bigger problems is that those two companies, Tencent and Alibaba, they know where you are paying …… they can use big data, they have your information if they really want to, so It’s an information security issue. They know your habits, where you buy coffee, where you buy groceries, which supermarkets you go to, which places you go for entertainment, which restaurants you usually go to, they all know.”
Kong Shangming said that during his last six to eight months in China, WeChat Pay did not work properly.
“Because they started asking me for more personal information, like all my money, where every penny came from. I don’t know if this was because I was a foreigner or some other factor. If I don’t provide that information, I can’t use their app anymore,” said Kong Shangming.
In July, several U.S. congressional senators urged the U.S. Olympic and Paralympic Committees to ban U.S. athletes from using the digital yuan during the Winter Olympics in Beijing, citing the possibility that it could be used for official surveillance.
According to the Chinese Communist Party, the digital renminbi is designed to be “controlled and anonymous” and advocates the principle of “anonymity for small amounts and traceability for large amounts according to the law,” and merchants accepting the digital renminbi are required to disclose their transactions to the “only third party “China’s central bank is the only third party to disclose transactions.
Reuters reported in April that China’s central bank said in public that the digital yuan would only serve as a backup and additional function and would not compete with Alipay or WeChat Pay. But state-owned banks promoting the digital currency for the central bank have said privately that the government’s intention is to undermine the dominance of both means of payment.
Kong Shangming said his Chinese friends told him that “although they’ve used [the digital yuan], they’re not quite sure what the difference is between it and WeChat Alipay.”
Kong Shangming said he feels that the Chinese Communist government could be more direct in its control of the digital yuan than WeChat Alipay.
“If the (Chinese) government wants information about my digital spending, it can now go to Tencent and Alibaba and ask for it. When the time comes, if it’s with digital currency, it could be more direct.”