All Eyes on Chinese E-yuan. Who Should be worried?

digital yuan

Make life easier to unbanked and boost yuan internationalization. What implications for the global economy? Foreing experts: “Beijing will improve state surveillance”. For now, China’s e-yuan is more cryptic than crypto.

Back in the Tang dynasty, China invented paper money. Today the country is ready to shake the whole fintech sector with its e-yuan. As stated by the media, China’s central bank has recently released a pilot version of a wallet app for the digital yuan in a push to expand its usage to more people. The “e-CNY” app is now available on China’s Android and Apple’s app stores. It allows users to open a digital yuan wallet and spend the currency.

China has been in the works since 2014 for its CDBD. The e-CNY is a digital version of China’s sovereign currency. It means that it is not a cryptocurrency like bitcoin but is instead issued and controlled by the People’s Bank of China

The digital yuan has not yet officially been rolled out nationally and there is no timeline for this, however the new app allows users in 10 areas including major cities Shanghai and Beijing to use it. Previously, only select users could use the app on an invitation basis. The Winter Olympics, which takes place this year in the Chinese capital, has been one of the events that the People’s Bank of China has been targeting as the latest attempt to get more people to use the digital currency.

Visitors to the Winter Olympics will be allowed to access the digital yuan with their passports, even if they don’t have any domestic Chinese banking accounts, trying to get the government-controlled payment rail into the hands of international visitors for a soft pilot of what is a long-standing goal: to more broadly internationalize the yuan. And now experts talk about how Chinese leadership is ready to launch its new digital national currency in the cross-border arena, mining US dollar leadership. But let’s take a step back.

How would China’s digital currency work? Not all the details has been revealed yet, but according to PBOC, first consumers will download the new digital wallet on mobile phone, then will load money from a bank account in one of China commercial bank charged in one of some ATM or even using only digital tools, then use their digital currency electronic payment like cash to make and receive payments with other users. Easy, smart and quick. That kind of sounds like a payment service, something that in China already has thanks to Alipay and WeChat Pay. So, if it's something Chinese users already have, would people even use it? And more importantly, why PBOC has taken the decision to launch its digital yuan. 

Domestic focus

As underlined last year by People’s Bank of China Deputy Governor Li Bo, the motivation for the e-CNY is primarily for domestic use. One of the mail goal is promoting financial inclusion. Despite China is leading the fintech sector, the country has the world’s largest unbanked population. According to data, 20% of Chinese people, accounting to 230 million adults, have no access to financial services. Especially those people living in rural areas, far from the modern and developed coastal areas, have no physical banks in their villages. In such circumstances e-wallet such as WeChat Pay or Alipay are the only tools to have basic financial services. 

Several studies has pointed out how the new e-yuan can be an effective tool when promoting financial inclusion. In other words, CBDCs will allow people who live in remote areas with no bank branches and therefore have no bank accounts, but who own a cell phone, to have access to a transaction account that will allow them to make and receive payments using this digital currency. Today PBOC app is already likened with Chinese major commercial and digital banks. 

Another reason behind the PBOC’s efforts could be to increase competition in the payments space and reduce systemic risk. Chinese authorities outlined how a CBDC could make payments more efficient and improve the transmission of monetary policy. A digital yuan could help with financial stability through a system of “controllable anonymity”. It means where the payments would be anonymous to some degree, data analysis tools could help the central bank catch illegal activities. In Guangdong province, for example, police already fined several entrepreneurs for tax evasion.

Challenging the US dollar? Let’s see what’s going on in Africa

In the last decade, China has been pushing the internationalization of the yuan and some commentators have seen the digital yuan as a way to do that. As we noted, the e-yuan has a domestic focus and international use is “not the immediate priority”, PBOC stated. By the way, last year the Chinese Central bank began laying the groundwork for digital currency to be used in cross-border transactions. In 2021 PBOC joined central banks from Thailand, United Arab Emirates and Hong Kong to explore a digital currency cross-border payment project together.

“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 US dollar or other international currencies. I think our goal is to allow the market to choose, to facilitate international trade and investment”, quoted Li Bo in a Bloomberg’s interview. The US dollar leadership is still firm. According to data, The Chinese currency now makes up about 6-7% of global foreign exchange reserves compared with nearly 60% for the U.S. dollar, and most of Beijing’s trade and loans in Xi’s Belt-and-Road Initiative are disbursed in dollars. 

But Beijing is moving fast and Washington is concerned the digital yuan, in the long run, could replace the dollar for international exchange. What really worries Biden’s administration is the possibility of creating an alternative and parallel payment system to make strategic acquisitions around the globe with those countries cutted off by the SWIFT circle.

China’s immediate focus is domestic, but Beijing is already trying to expand it’s e-yuan in Africa. Last year, Huawei introduced into the African market the Mate 40, a smartphone with a pre-installed e-CNY wallet that uses the DCEP network. It appears that China’s secondary focus may very well be Africa – with an eye towards disrupting the global financial system. What is appealing is the possibility of transferring money between two offline devices by using what the Chinese media calls “dual offline technology”, a type of near-field communications technology similar to Bluetooth, analysts say.

Competing the tech giants

Is not a mystery that the PBOC launched it’s digital currency to act as a back-up to Alipay and WeChat Pay, because these two super-app tighter make up about 98% of the mobile payments market in China. Still, the e-CNY app will face stiff competition from China’s two dominant digital payment apps. Both allow users to top up their accounts, transfer money, and make payments with QR codes or NFC just like the e-CNY app, giving consumers few incentives to switch to the digital yuan. Walking in Shenzhen, for example, is kinda hard to find a shop or seller that accepts the new PBOC currency. Experts pointed out how autoretithies should offer really attractive and appealing discounts to make users spend it.

About 140 million Chinese residents had opened a digital yuan account as of October 2021, with accumulated transactions reaching 62 billion yuan (US$9.7 billion) since launch, Mu Changchun, head of the Digital Currency Research Institute, said in November. In contrast, in September 2021, Alipay reported over 658 million monthly active users.

Political challenges 

The new digital currency is, without doubt, a powerful tool ool against fraud, tax evasion and money laundering, but others also say the digital currency is far more than just a medium for exchange. Because the e-yuan would allow to monitor transactions in real time, it could be easier for authorities  to retaliate against people or firms - both national or foreign - who speak out on sensitive issues such as Xinjiang, Hong Kong or Taiwan, banning them from the Chinese market. Foreing analysts are afraid that the e-yuan can be a tool to facilitate mass surveillance over the Chinese population. 

There are two aspects to the question: distribution and then eventually how it will be spent. Despite PBoC has not published any official guideline on how to use the new currency, according to people on matters, if facing any illegal act, the PBOC could easily block your e-wallet or fine you for deciding a limit of amount of money that the user could spend. It looks like the e-CNY will be also connected with “social credit system”. 

What about privacy? Is the e-yuan a new social-control tool?

But there is a bigger challenge in the roll-out: the privacy issue. Beijing’s ambitions for the digital renminbi derive from a deep-seated impulse towards social control, analysts say. It means that deploying the e-yuan will set the central bank up to mine a huge trove of data on its citizens’ economic activity. Plus, China’s ability to see every transaction may make it difficult for foreign banks to use the digital yuan and still comply with confidentiality rules in their home countries.

The PBOC has said user information won’t be completely exposed to banks. “The electronic yuan has the “highest level of privacy protection” and the central bank wouldn’t directly know the identity of users, but the government could get that information from financial institutions in cases of suspected illegal activity, balancing between the ‘controllable anonymity’ and anti-money laundering, CTF [counter-terrorist financing], and also tax issues, online gambling and any electronic criminal activities”, underlined Mu Changchun, director of the central bank’s Digital Currency Research Institute.

So, what’s next? Fifteen centuries after China invented banknotes, once again, the nature of money is set to fundamentally change. It will probably take time for PBOC to ascertain citizens’ preferences for the digital yuan relative to other forms of payments as well as testing all the technical features, but the new e-yuan presents a step change in the international financial arena. Despite all controversies, all eyes are on China and other central banks are studying this new national digital currency.