Central bank digital currency: China paves the way

Opinion: When athletes, team officials and (a few) visitors turned up to the Winter Olympics in Beijing in January this year, they found a new way to pay for things in the village – a digital currency.

Issued by China’s central bank, the e-CNY (Chinese yuan) pilot at the Olympics was the highest-profile test of a digital currency anywhere in the world. Albeit a Covid-inhibited test. Since then, China has taken part in another pilot alongside central banks in Hong Kong, Thailand and the United Arab Emirates. The US$22 million trial cemented the position of the People’s Bank of China at the forefront of a worldwide movement where most countries, New Zealand included, are still deciding whether to dip their toes in the water.

According to a 2021 survey report of the Bank for International Settlements (BIS), 86 percent of the countries surveyed are actively researching the potential for a central bank-issued digital currency (CBDC), 60 percent have begun experimenting with the technology, and 14 percent are already deploying pilot projects.

In August 2021, the Reserve Bank of New Zealand launched public consultation on the prospect for a CBDC to work alongside cash as government-backed money. At a conference in Auckland in November 2022, RBNZ Assistant Governor Karen Silk said the bank continues to explore the idea of a central bank digital currency and how it might work, although in June the RBNZ’s director of money and cash, Ian Woolford, told interest.co.nz “the RBNZ has not yet made a formal decision on whether it will launch a CBDC or not, and it will likely be years not months before it does”.

China meanwhile began to study and develop an electronic form of its legal tender in 2014. The groundwork was completed in 2019, and the e-CNY (Chinese yuan) - also commonly referred to as digital renminbi (RMB) or the Digital Currency/Electronic Payment – has, since 2020, been tested in an increasing number of cities and scenarios within China.
As of June 2021, 20.8 million personal and 3.51 million corporate digital yuan wallets had been opened, according to data released by the People’s Bank of China (PBC). And by the end of August this year, the bank reported more than 100 billion yuan ($23 billion) had changed hands across 360 million transactions.

The birth of the e-CNY comes into an environment shaped by the proliferation of alternative payment systems in China, the high popularity of smartphones among the Chinese, and the way retailers and commercial operations have adapted to different payment methods.

Thanks to public enthusiasm for mobile payments, China already leads the world in building a cashless society. In major cities like Beijing, digital and mobile methods of transferring money are so common, and physical cash so rare, that even beggars in the street carry laminated QR codes to receive donations.

The e-CNY is designed to operate like electronic cash which can directly circulate from one e-wallet to another. There’s also the possibility the digital currency could circulate without going through a third-party platform – the banking system, for example. It could even operate without needing the internet, according to an article in the China Daily.

“The offline wallet is a special facility or app installed in mobile phones or other terminal devices. If there is no internet connection or the network signal is weak… [sellers] would have to verify the identity of users, confirm the transaction information and make payment just through the wallet,” the article said.

The e-CNY is expected to not only reduce payment service charges, but also make digital transactions easier and more accessible for senior citizens, remote rural communities with poor internet connectivity, and other digitally marginalised social groups.

Proponents say the e-CNY could be a more convenient, lower-cost, and better credit-risk-controlling payment mechanism. It could also one day break the duopoly of the digital/mobile payment giants Alipay and WeChat Pay, and dent the power of the credit card company UnionPay.
But it’s still early days.

For the time being the digital yuan, as a new, evolving, and so far relatively small Chinese e-commerce phenomenon, needs the support of the established third-party payment platforms. And the partnership with the People’s Bank of China’s digital currency may in turn open doors for these platforms to reinvent themselves for continued and new business opportunities.

Then there’s the international market. Alipay, WeChat Pay and UnionPay are now accepted by millions of stores across the world and are expanding globally. UnionPay and Alipay have signed partnership agreements with, respectively, PayPal Holdings and JP Morgan.

Given their active involvement in the development and trial of the Digital Currency/Electronic Payment system, the three leading Chinese digital payment platforms with their ever-widening global presence may easily and readily provide e-wallet services to the e-CNY in both domestic and cross-border transactions.

That China is at the forefront of central bank digital currency development has made many in the international community wonder whether the digital RMB will reshape the world’s currency landscape. Within China, e-CNY trials across a number of cities and provinces have also fuelled an expectation among some that the digital yuan will boost a more global adoption of the yuan.

Still, many in Chinese academic and financial policy circles point out that to further internationalise its currency China needs, above all else, to continue pushing forward the opening of the financial services industry, the convertibility of capital accounts, and the freeing of exchange rates.

While China is already the world's largest trading country, and the Chinese yuan is the fourth most-used payment currency (after the US dollar, the Euro, and the British pound), its share still accounts for only about 3 percent of the global transactions. The yuan has seen increased use in cross-border energy and other produce settlements since the eruption of the Russia-Ukraine war, but the use of the e-CNY in cross-border financial flows and the international business operations of Chinese companies may be some way away yet.