Mainland China is getting close to launching a digital currency. With the declining use of cash and rise of foreign cryptocurrencies, the People’s Bank of China has been piloting the ‘e-CNY’ in cities such as Shanghai and Chengdu. However, this year it moved to a higher level of testing – handing 100,000 digital wallets containing yuan worth about USD30 to residents of Shenzhen via a lottery.
The trials have expanded from small-scale closed-loop tests to large-scale open testing. In addition to offline payments, the e-CNY wallet supports online payments on an e-commerce platform. Wider trials in 28 other cities including Beijing and Guangzhou will be conducted this year and extended to two offshore renminbi hubs – Hong Kong and Macau – where pilots are focusing on cross-border payments for retail and tourism spending.
We believe the e-CNY could be ready for nationwide adoption in 2022 or 2023.
The e-CNY would digitalise part of the physical notes and coins in circulation and be issued by the People’s Bank of China and backed by reserves. But distribution would be by the private sector through mobile-banking apps. The central bank will make transfers to select institutions using a centralised ledger, but they may use blockchain.
The wallet could link to other payment accounts, including bank accounts and third-party mobile-phone payment platforms.
One e-CNY is worth one renminbi. Like cash, at least initially, it would not pay interest. It is intended for spending, not speculating. Unlike popular digital currencies whose values fluctuate or are fixed to a basket of currencies, it would not be traded on exchanges.
The digital currency will eventually become widely available to residents in mainland China, though it is not yet clear if international tourists and other foreigners will have access.
Cash usage has declined rapidly in mainland China. More than half the population use mobile phones for payments – 720 billion transactions in 2019, worth 250 trillion renminbi or almost USD40 billion. There are over 1.5 trillion renminbi of funds in third-party mobile payment platforms.
The e-CNY not only helps to address the declining cash usage and challenges from foreign digital forms of money, it also simplifies cross-border payments (currently often made in US dollars) and allows policymakers to monitor money flows and act accordingly.
But while the official launch of the central-bank digital currency may be in the not too distant future, there could also be important long-term implications for renminbi internationalisation, especially if the e-CNY can eventually be transacted beyond mainland China’s borders.
However, other conditions are also necessary. The e-CNY must be at the forefront of digital currencies in user-friendliness, security and settlement technology, but Beijing also has to relax capital restrictions further, in particular, allowing capital outflows more freely.
International users need to have more confidence in the renminbi too. Ultimately, a currency’s internationalisation depends on economic principles, not only technology.
First published 1 February 2021.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Mackel.
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