The Cheat Sheet

What China’s digital currency means for the world

Jinoy Jose P | Updated on August 12, 2020

Well, is the China sovereign e-currency really happening?

Just last week, reports suggested that four commercial banks in China began large-scale testing of the much-hyped digital currency. The state-run lenders are no ‘small change’ — Bank of China, China Construction Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China are the four largest banks in the world, with a customer base that runs into many millions. This means, if their tests come out cool, the digital renminbi will become the world’s first sovereign digital currency.

Wow! But why does China want a digital currency?

China is one of the most digitally penetrated countries in the world. It has seen impressive acceptance of financial technologies and digital payments. China’s digital payments ecosystem is arguably more advanced than many of its Western counterparts, including the US and the EU, according to The Brookings Institute, a think tank, which observes that China’s new financial system is built on digital wallets, QR codes, and runs through its own big tech firms: Alipay of Alibaba and WeChat Pay of Tencent. So, it is natural that the Red government has planned to take the next step and experiment with an all-encompassing digital currency like the popular bitcoin.

Is China the only country planning an e-currency?

Not at all. According to a 2019 survey by the Switzerland-based Bank for International Settlements, most central banks (80 per cent) are fiddling with the idea of a sovereign digital currency. This includes the US and the European Central Bank. The G7 countries have been planning a collective move on central bank-sponsored digital currencies. Even the RBI has been contemplating bringing out a national digital currency if and when safe technologies emerge. India’s National Blockchain Strategy envisages a sovereign digital currency. But it seems China has gone ahead with its plans and is set to roll out one for mass use.

What is China actually testing?

Now, reports say that citizens can use the e-wallet to top up accounts, pay for purchases, withdraw and transfer money after pairing the digital currency with the phone number. The Chinese banks are also testing if the e-currency can be exchanged offline, that is, without the Internet.

Impressive. But how different is this from bitcoin or Facebook’s Libra?

In many ways. To start with, this is legal tender, endorsed by the state. Bitcoin is not legally accepted in many geographies, including India, where an order from the RBI in April 2018 disallowed the use and exchange of cryptocurrencies by financial institutions it monitors. India, in fact, is contemplating a law banning cryptocurrencies altogether. Bitcoin is designed to be anti-authority and is not controlled by a central bank or a government, which makes it prone to giant fluctuations in value. As we speak, the ace digital currency is having a gala time on the value front, hovering above $11,000 apiece.

That’s interesting.

Clearly, China expects to cash in on the global trend towards digital currencies by being an early-mover (the digital renminbi was announced as early as in 2014). Also, it eyes the global disruption it can cause in the currency markets with a digital renminbi. Considering the fiat renminbi is often accused of being subjected to manipulation by China’s Communist government, the future of an e-renminbi will also be shrouded in secrecy. Still, experts in international finance say China is looking at the fact that it is much easier to transfer e-payments across the border while controlling it from within the country.

Is it trying to create a universal currency, then?

Unlikely, as things stand now. Globally, China doesn’t enjoy the political goodwill to moot an alternative to the dollar, however weak the US currency and economy seem today. According to Chinese monetary policy experts, such as Qu Qiang, assistant director of the International Monetary Institute at the Renmin University of China, “a universal currency cannot exist at this stage”. Still, considering the clout China enjoys in the international money market and its secret ambitions to plug the yuan as the global currency, the digital renminbi , if rolled out for regular use soon, can potentially lead to some tectonic shifts in the way money moves within China and beyond.

A weekly column that helps you ask the right questions

Published on August 12, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like