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 recent projects is the development of a digital national currency (数字人民币). It comes during a period of surging worldwide digital transactions, as many considered digital payments a safer and more hygienic alternative to cash during COVID-19. As a trial, the Chinese government issued around 50,000 so-called 'red packets' by lottery to citizens in Beijing over Chinese New Year — following earlier trials in 2020 in Shenzhen and Suzhou. Several rounds of testing have already been completed, 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 particularly impactful given that a large proportion of transactions in China already happen digitally, through platforms such as Alipay (支付宝) or WeChat Pay (微信支付) — which together account for 95% of all digital transactions in China. However, the goal of the digital yuan is not to change digital payment but to replace paper currency as the standard. It will therefore barely affect those who already predominantly use digital payments.

The digital yuan is designed to enable payments through a "dual offline payment" (双离线支付) system, which functions similarly to Bluetooth — using geolocation to allow users to transfer money between devices in close proximity without requiring an internet connection. This will be particularly important in China, where mobile phone penetration significantly exceeds internet connectivity.

While China is a frontrunner among the world's large economies in digital currency, it is not the first country to launch one — Cambodia launched its own digital currency, Bakong, in October 2020. Several other Asian countries, including Japan and South Korea, are also developing national digital currencies. This comes at a time when corporate-led digital currencies such as Bitcoin and Facebook's planned Libra currency are drawing increasing attention. The key difference is that the digital yuan will have a relatively fixed value, similar to the current renminbi.

Why Would China Want a Digital National Currency?

The main incentives cited for China's digital currency are safety, the ability to enable anonymous payments, and privacy protection. According to Reuters, a significant additional motivation is that it allows both the Central Bank and commercial banks to better track the flow of money — something nearly impossible to achieve with paper currency.

Another driver was the Chinese Central Bank's desire to curb the influence of the two tech giants that have dominated digital transactions: Ant Group (Alipay) and Tencent (WeChat Pay). This is part of a broader trend in which the central government attempts to reassert control over e-commerce from large private companies — perhaps best exemplified by the disappearance of Alibaba CEO Jack Ma from public view earlier in 2021, and President Xi Jinping's statement that restricting the influence of "Big Tech" would remain a priority in the years ahead.

Setting up the digital yuan effectively creates an alternative payment channel that circumvents traditional platforms. In an interview with the Financial Times, a senior analyst at the Australia Strategic Policy Institute stated that the issuance of the digital renminbi is about the Chinese Communist Party's "ability to exercise control." The digitalisation of the renminbi is also intended to make the currency more attractive to foreign users — part of a larger Chinese effort to internationalise the yuan and reduce its dependence on the US dollar. Despite China being the world's second-largest economy, the yuan accounted for only around 2% of global foreign currency reserves in Q3 2020.

Forbes reports that the Center for a New American Security has raised concerns that the digital renminbi represents a significant threat to "long-held standards of financial privacy upheld in free societies." Chinese state media, however, maintain that the primary rationale is to combat the shortcomings of cash — including tax evasion, terrorist financing, and money laundering. The broader question of whether digital currencies will make national currencies a more geopolitical issue — with tech giants and governments competing for control — remains an open and increasingly important one.