Let’s Talk About China’s Digital Yuan

What are the country’s plans for its digital currency?

Several countries are working on their own digital currency these days and the news about China’s digital yuan is not entirely new. But for the uninitiated, here is a quick explanation about China’s digital currency.

Meet China’s Digital Yuan

The Digital Currency Electronic Payment (DC/EP) is a digital version of the yuan, which is China’s national currency. The DC/EP is backed by yuan deposits held by China’s central bank, People’s Bank of China.

Under the current arrangement, banks are required to convert a part of their yuan holdings into digital form and distribute them to businesses and citizens through mobile technology. The DCEP system can support payment transactions even without an internet connection unlike the other online payment platforms like Alipay, WeChat Pay.

What’s In It For China?

Better Tracking: When a business activity or financial transaction takes place, information about the cash flow and credit data will be stored in a database. Xu Yuan, a senior researcher with Peking University’s Digital Finance Research Centre told South China Morning Post, “The database can be checked in real time and play a role in keeping digital records and checks against citizens who have committed money laundering, tax evasions or other related offences.”

Banking The Unbanked: According to the World Bank, China is home to 225 million adults who do not have an account, making China as the country with the world’s largest unbanked population. So, a digital currency will help more of the unbanked to take part in the mainstream economy without expensive banking products and infrastructure.

Improve Reserve Currency Status: The digital yuan is in line with China’s top policy initiative to internationalize the yuan and improve reserve currency status if the DCEP payment system involves cross-border payments for the use within e-commerce by other countries. The digital yuan would lower transaction costs for enterprise and residents in other countries as compared to cash.

Replacing Dollar?

Recently, sources told Bloomberg that the Biden administration is increasing scrutiny of China’s plans for a digital yuan, with some officials worried the move could begin a long-term bid to replace the dollar as the world’s dominant reserve currency. So, is that what China is really after?

According to PBOC Governor Li, that’s not what China is after at all. On a panel at the Boao forum, Li said, as quoted by Bloomberg, “For the internationalization of the renminbi, we have said many times that it’s a natural process, and our goal is not to replace the U.S. dollar or other international currencies.” He also said that the motivation for the e-yuan, for now at least, is focusing mainly on domestic use.

Looking Ahead

China is testing its digital currency in several cities already, and it is looking to test the e-yuan in additional major cities, including Beijing and Shanghai, this year. PBOC is looking to test the cross-border use of the digital yuan at the 2022 Beijing Winter Olympics. It could be used by both domestic users and athletes as well as investors from overseas in the Olympics.

If launched, the digital currency could give a major boost to the country’s payments system. However, we have to wait and see how the testing goes and whether the U.S. takes any action against it in the near future.

Head to moneyguru’s Insight section to stay updated on all major financial news updates of the day!

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