China's Digital Currency: the E-Yuan
The People’s Republic of China is often mentioned as an upcoming innovation powerhouse, with fast developments in sectors such as high-speed railways and e-commerce. One of the more noteworthy projects in recent times is that of the digital national currency (数字人民币). It comes during a period in which worldwide digital transactions have surged, as many considered it a safer and more hygienic alternative to cash in times of COVID-19. As a means of trial, the Chinese Government (through lottery) issued around 50.000 so called ‘red packets’ to citizens in Beijing over Chinese New Year. Such trials had already started earlier in 2020, in Shenzhen and Suzhou. At this moment, there have already been several rounds of testing to ensure that the new digital payment system runs smoothly, with the currency set to be officially issued before the Beijing Winter Olympics in 2022.
How does the digital currency work?
A digital currency might not seem very impactful on the way in which current digital transactions are done in China, as seemingly already a large amount of transactions happen digitally, through platforms such as Alipay (支付宝) or WeChatPay (微信支付). These two account for a staggering 95% of all digital transactions in China. However, it is not the goal of the digital currency to change digital payment, but rather to replace paper currency as the standard. Therefore, it will barely affect those who already predominantly use digital payments for their transactions. The digital yuan is supposed to make payments possible with a so-called “dual offline payment” (双离线支付) system, which functions very similar to Bluetooth. This system would use GPS to allow users to transfer money from one device to another, provided that they are close to one another, without the need for an internet connection. This will be particularly important for usage in China, as the percentage of people that have a mobile phone is much higher than the percentage of people that have an internet connection.
While China is a frontrunner in digital currency when it comes to the large economies of the world, it is by no means the first country to launch a digital currency. Cambodia already launched their own digital currency, Bakong, in October 2020. Several other countries in Asia, such as Japan and South Korea, are in the process of fielding their own versions of a digital national currency. This all comes in a time where corporate-led digital currencies are drawing ever more attention. Examples include Bitcoin or Facebook’s upcoming Libra currency. The main difference between the Chinese national digital currency and those made by companies is that it will have a relatively fixed value, similar to that of the current ‘old’ renminbi.
Why China would want a digital national currency?
According to Xinhua News, the main incentives for China to adopt a digital currency are that it is safer, it allows for anonymous payments, and it protects one’s privacy. According to Reuters, another significant reason China has opted for their own digital national currency, is that it allows both the Central Bank and commercial banks to better track the flow of money, which is something that is almost impossible to achieve with paper currency.
Another reason the Chinese Central Bank was so eager to develop their ‘own’ digital currency, was to curb the influence of the two tech giants that have dominated the digital transaction sector until now: Ant Group (AliPay) and Tencent (WechatPay). This is part of a larger trend, where the Central Government attempts to take back control of the e-commerce from large companies, which was perhaps best exemplified by the disappearance of Ali Baba CEO Jack Ma earlier this year. This trend has been further confirmed in a speech by President Xi Jinping, who stated that restricting the influence of ‘Big Tech’ will still be a priority for Chinese policy in the years to come.
Setting up the digital yuan basically means setting up an alternative paying channel, thereby effectively circumventing the ‘traditional’ paying platforms. In an interview with the Financial Times, a senior analyst of the Australia Strategic Policy Institute said that the issuance of the digital renminbi is indeed about the Chinese Communist party’s “ability to exercise control.” Finally, the digitalization of the renminbi is also supposed to make the currency more attractive to foreign users, which is part of a larger Chinese effort to make the yuan a more international currency, similar to the American Dollar. This seems a logical move, as the Chinese yuan, despite China being the world’s second largest economy, only accounted for around 2% of global foreign currency reserves in the third quarter of 2020.
Forbes writes that these developments have worried some institutions, such as the Center for a New American Security, which issued a report on the new Chinese digital currency, arguing that the digitalization of the renminbi is a significant threat to the “long-held standards of financial privacy upheld in free societies.” Chinese state media, however, maintain that the main reason for developing a national cryptocurrency is to combat its many ‘shortcomings’, such as tax evasion, terrorist financing, and money laundering. Still, there are those who worry that digitalization of national currencies might make currencies a much more geopolitical issue, as tech giants and national governments might fight over who will be able to issue and facilitate digital currencies.
It remains to be seen how effective the digital yuan will ultimately be; already there are warnings of “digital yuan scammers”, who are trying to cheat the new system before it has even been formally released. Then there is the future of transactions: will digital transactions fully replace ‘hard’ cash, or will it only be an alternative method of payment? In any case, the further development of the digital renminbi, as well as its implications for the Chinese economy, and for the future of digital transactions, is definitely something to keep our eye on.