• There are strong indications that Beijing is pressing hard for the international use of its new digital currency
  • For now, China’s ambitious DCEP is ahead of the curve – and Western policymakers are starting to take notice
  • A cheaper and faster payment system, which could also avoid US sanctions, would be viewed as a challenge to the dollar’s dominance

Since the pandemic hit last year, China has made headlines by charging ahead with its efforts to become the first major power to implement a sovereign digital currency. China’s digital yuan will replace its physical currency and the project goes by the name Digital Currency Electronics Payment (DCEP).

Although the concept of a central bank digital currency (CBDC) is not new and many governments around the world are already exploring its potential, China’s development and soft launch of DCEP puts it at the global forefront of actively implementing digital currencies.

As it is, China is heading closer and closer towards becoming a cashless society in the past few years. In 2020 alone, cash-free transactions amounted to 320 trillion yuan (US$49 trillion), accounting for every four out of five payment transactions on the mainland.

According to Statista, there were 853 million mobile payment users in China last year, more than half the Chinese population. Currently, this vast e-payments market is dominated by two huge private companies, Ant Group (Alipay) and Tencent (WeChat Pay), estimated to have a global active userbase of around 1.9 billion.

According to the People’s Bank of China, the amount of money involved in non-cash payments, including commercial papers, bank cards, and online payment vehicles, totaled 4,013.01 trillion yuan (about US$613.84 trillion) last year, up 6.18% year-on-year (YoY). In the fourth quarter alone, the volume of non-cash payments climbed 10.29% from the previous year, and specifically, mobile payments sustained an upward trend in 2020, with the total volume jumping 24.5% YoY.

Challenging dollar hegemony?

To begin with, why would Beijing wish to add yet another payment system, DCEP, when the country is already hurtling towards a near-total cashless society? The answer goes to the core of President Xi Jinping’s autocratic government. Unlike other e-payment systems, DCEP will be centralized and state-run. Beijing will be able to monitor how money is spent in real-time and have the same controls over DCEP as with the yuan

There will be no third party involved — the PBOC issues the e-yuan, the central bank’s digital currency, directly into a digital wallet and its status as legal tender is guaranteed by the Chinese state. That said, a cheaper and faster payment system – which could also avoid US sanctions – would be viewed as a challenge to the dollar’s dominance.

With over 90% of international transactions presently conducted in US dollars, Beijing hopes the digital yuan will allow it to bypass the all-mighty greenback. That sentiment was echoed by Daryl Guppy in an op-ed for state-media outlet CGTN, highlighting that “a sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level.”

Simply put, with China’s new digital currency, international trade can be done in its own currency, Renminbi. Essentially, instead of the value of transactions being hedged in US dollars, they can utilize a blockchain escrow in Renminbi, and the transaction doesn’t require US facilitation or interference.

Currently, there are many ways China is attempting to take the digital yuan to the world. One is using homegrown startups like Didi, which has already penetrated Latin America with its ride-hailing model and has announced plans to enter the European market – where it could begin offering future rides to be paid for in digital yuan.

Another way is through trade, analysts reckon. Indeed, China’s Belt and Road initiative (BRI) is a ripe entry point for the digital yuan’s internationalization. The government could ask BRI-participating countries to start accepting the digital yuan, make loan payments and pay to install infrastructures such as point-of-sale terminals and lower transaction fees.

Last August, China waived transaction fees between the yuan and twelve other currencies, including the Singaporean dollar, Korean won, Thai baht, and Russian ruble. According to China’s State Administration of Foreign Exchange, the decision was taken to “actively cooperate with the national belt and road development strategy.” In another signal of its commitment to internationalizing the digital yuan, the PBOC announced on February 24 that it would be joining the Multiple Central Bank Digital Currency Bridge to study the feasibility of the use of digital currencies in cross-border transfers, international trade settlement, and foreign exchange transactions.

The post Can China’s digital yuan give the dollar a run for its money? appeared first on Tech Wire Asia.

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