China’s digital yuan, also known as e-CNY or e-yuan, is a central bank digital currency (CBDC) issued by the People’s Bank of China (PBOC). It is a legal tender that is valued the same as the standard renminbi (RMB). It is designed to improve the efficiency and security of the central bank’s payment system, provide a backup for the retail payment system, and enhance financial inclusion. China’s digital yuan is also aiming to increase its cross-border use and challenge the US dollar’s dominance in the global financial system.
China Leads the World in CBDC Development
China has been researching and developing its digital currency since 2014, and launched a research institute devoted to the concept in 2016. It started the pilot phase of the e-CNY project in 2020, and has since conducted several trials and tests in various cities and regions across the country. According to a PBOC white paper, as of June 2021, more than 20.8 million personal wallets and over 3.5 million corporate wallets have been opened, and more than 70.75 million transactions have been processed, involving a total value of over 34.5 billion yuan ($5.39 billion).
China is the first major economy to launch a CBDC, and has been a pioneer in digital currency innovation. It has also been actively collaborating with other countries and international organizations to explore the potential and challenges of CBDCs. For example, China has joined the Multiple CBDC (m-CBDC) Bridge project, a joint initiative by the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, and the Digital Currency Institute of the PBOC, to study the feasibility of cross-border payments using CBDCs. China has also participated in the G20 roadmap for enhancing cross-border payments, and has contributed to the reports and guidance issued by the Bank for International Settlements (BIS) and the Financial Stability Board (FSB) on CBDCs.
China Eyes Cross-Border Opportunities for the Digital Yuan
While China’s digital yuan has been mainly used for domestic retail transactions, the PBOC has also been looking to expand its cross-border applications and promote its internationalization. According to a Reuters report, the Chinese government is seeking to “strengthen” its cross-border yuan payments infrastructure over the next five years, as part of an overall initiative for financial standardization. The country will reportedly explore standardizing infrastructure that in turn would be tied to digital fiat.
China has already taken some steps to enable cross-border use of the digital yuan, especially in the regions of Hong Kong and Macau, which have separate economic systems and currencies from the mainland. For example, last week, the Bank of China’s Dongguan Branch unveiled the country’s first automated digital yuan wallet-opening machine for overseas passport holders, allowing them to use their credit cards to fund a digital yuan wallet. The PBOC has also signed a memorandum of understanding with the Monetary Authority of Singapore (MAS) to launch a cross-border digital yuan pilot, which will allow travelers to use the e-CNY for payments in both countries. Moreover, the PBOC has been working with the Hong Kong Monetary Authority (HKMA) to test the technical feasibility of connecting the e-CNY system with the Faster Payment System in Hong Kong, which supports both the Hong Kong dollar and the RMB.
China Challenges the US Dollar’s Hegemony with the Digital Yuan
One of the possible motivations behind China’s push for cross-border digital yuan is to challenge the US dollar’s position as the world’s dominant reserve currency, and in the process shake up the global geopolitical order. The US dollar has enjoyed global economic influence in part thanks to its role as the main currency for trade, foreign exchange reserves, and cross-border transactions. However, China’s digital yuan has the potential to weaken the ability of the US to retain trading partners, enforce sanctions, and monitor financial flows. Moreover, the digital yuan raises cybersecurity concerns related to data protection, espionage, and financial stability.
China, the world’s largest bilateral creditor and leading trading partner, could use the digital yuan to elevate the status of the RMB and increase its clout in the international financial system. By offering a faster, cheaper, and more secure alternative to the existing payment channels, China could attract more countries and regions to adopt the digital yuan, especially those that are part of the Belt and Road Initiative (BRI) or the Association of Southeast Asian Nations (ASEAN). China could also leverage the digital yuan to bypass the US-led SWIFT network, which facilitates cross-border payments and transfers information among financial institutions, and avoid the risk of being cut off from the global financial system due to US sanctions or disputes.
China’s digital yuan is not only a technological innovation, but also a strategic move to reshape the global financial landscape. As China continues to pilot and promote its CBDC, the US and other countries will have to respond and adapt to the changing dynamics of the digital currency era.