China's Digital Yuan and Geopolitical Implications

Friday - August 4 2023, 08:55 UTC - 1 year ago

China's digital yuan was seemingly born out of a desire to centralize a payment system dominated by the tech companies Alibaba and Tencent. According to its central bank, the digital currency, also known as the e-CNY, is both a risk-free alternative to these commercial platforms and a replacement for physical cash, which is becoming obsolete. If it’s successful, it could challenge the US dollar’s position as the world’s dominant reserve currency—and in the process shake up the global geopolitical order.

China’s digital yuan was seemingly born out of a desire to centralize a payment system dominated by the tech companies Alibaba and Tencent. According to its central bank, the digital currency, also known as the e-CNY, is both a risk-free alternative to these commercial platforms and a replacement for physical cash, which is becoming obsolete.

Almost three years into the pilot, though, it seems the government is still struggling to find compelling applications for it, and adoption has been minimal. Now the goal may be shifting, or at least broadening. China appears to be charging ahead with plans to use the e-CNY outside its borders, for international trade.

If it’s successful, it could challenge the US dollar’s position as the world’s dominant reserve currency—and in the process shake up the global geopolitical order.

The (public) rationale .

From the outside looking in, it is impossible to fully ascertain the government’s plans for the e-CNY. Though the People’s Bank of China (PBOC) has not been shy about its central bank digital currency (CBDC) project, it has revealed few specific details about how the e-CNY actually works—or how it ultimately intends to use it.

One thing we do know is that it’s been a long time in the making. While Alibaba and Tencent launched their digital payment systems in 2004 and 2005 respectively, China began researching digital currency technology in 2014 and launched a research institute devoted to the concept in 2016, hoping to create a centralized alternative. Then in 2019, after Meta (then called Facebook) proposed its own global digital currency, PBOC officials expressed concern that the coin, called Libra, might undermine the monetary sovereignty of China’s currency, the yuan. The next year it started the e-CNY pilot phase, which is still ongoing.

According to Mu Changchun, director general of the PBOC’s Digital Currency Institute, the e-CNY project has three main goals: to improve the efficiency of the central bank’s payment system, provide a backup for the retail payment system, and "enhance financial inclusion".

"Now we can provide 24/7 services to the general public," he said during a talk he gave via Zoom for an event hosted last year by the Atlantic Council, a foreign policy think tank in Washington, DC. Mu added that the e-CNY will broaden access to the PBOC’s payment system—extending it to, among others, more private-sector firms, including fintech companies and telecom operators.

Mu said e-CNY will also serve as a necessary backup to the popular mobile payment apps Alipay and WeChat Pay, which dominate China’s daily retail transactions. Most people in China don’t use cash or credit cards but rely on their phones to buy things, so these commercial platforms have become "significantly important financial infrastructure," Mu said. If something ever goes wrong with them, "that will bring a very significant negative impact to the financial stability of China," he said.

On top of that, between 10% and 20% of people in China don’t have bank accounts and can’t access the commercial financial system, said Mu. Visitors to China from other countries also often have difficulty accessing money due to foreign exchange restrictions. This privacy of the e-CNY solves all these problems, he said.