(ATF) One sure-fire way of telling whether an idea will catch on is to apply the McDonald’s test: if the global fast-food behemoth is willing to give it a go, then other huge names are sure to follow.
That seems to be the case with China’s plans to launch a digital yuan, which the American burger icon has expressed interest in joining, along with Starbucks and Subway.
Now all eyes are on the cities of Chengdu, Suzhou and Shenzhen, which are said to be added to a trial of the system this week. If all goes well, China’s policy makers are widely expected to seize on the virtual renminbi to achieve a long-cherished dream: to project the renminbi to global reserve status and shrug off Washington’s financial and geopolitical hold on the country’s finances.
The People’s Bank of China (PBoC) detailed its central bank digital currency (CBDC) plan late last month, with the announcement that a city close to Beijing had been singled out to test the system.
Local government employees in Hebei province’s Xiongan New Area would be paid part of their May salary into digital wallets on their smartphones, the PBoC said. They’d be able to spend the virtual cash at cafes, restaurants, bookshops and hotels that had been selected as guinea pigs for the trial, it added. Four of the nation’s largest state-owned banks have also been brought into the project, as well as internet companies, it said.
Rumours had been rife about what form the crypto-yuan might take after the central bank confirmed in early April it was mulling a CBDC scheme. The PBoC said the aim of a central bank-backed coin was to help develop the country’s digital economy.
“The central bank will proceed in an orderly manner as planned,” Zhou Xuedong, director and spokesperson at the PBoC, said. “Nowadays, more than 95% of daily micropayments are realised through mobile payments or internet payments. China has certain advantages in this regard. If the digital economy can become a new economic development bright spot, the research and development requirements for digital currencies will become higher and higher.”
The announcement came as the PBoC unleashed another swathe of policies and stimulus to pull the country out of the economic decline wrought by the coronavirus crisis. Observers at the time speculated the plans for a cashless setup might have been brought forward to help in fighting the spread of coronavirus, which is thought to be passed between people on the surfaces of items including banknotes and coins.
China’s Science and Technology Innovation Express News subsequently said that Suzhou would host the first trial runs. At the same time, images purporting to show the smartphone user interface of the CBDC were “leaked” to local media.
Described in reports as a digital currency/electronic payment (DC/EP) platform, it appeared to commentators that the digital yuan would not be backed by a blockchain. That would be in contrast to other CBDC proposals, which are being mooted to sit on decentralised electronic ledgers that provide the backbone for commercial cryptocurrencies such as bitcoin.
The PBoC announcement said Chengdu, Suzhou and Shenzhen would join the trial after the May Day holidays, which ended on Tuesday.
An idea whose time has come?
CBDCs are not a new idea and by no means confirmed to China. However, the world’s second-largest economy may see a very different CBDC than those being mooted in other countries and it may be used for very different purposes.
The Federal Reserve, the Bank of England and at least a dozen more central banks are considering their own digital currencies. According to the Bank for International Settlements, more than a half of the world’s central banks have similar ideas.
China is the only country that has begun testing one.
The digital yuan will not be like bitcoin, however – in fact it will be the complete opposite. Cryptos are decentralised tokens whose transactions are recorded only by the transactors on distributed ledgers, or blockchains. CBDCs – especially China’s – will be controlled by the central bank.
China’s Communist leadership is also drawn to the idea of digital currency for the same reason many in the West are set against Facebook’s proposed Libra coin – because it can be controlled and manipulated by a remote, centralised body.
The advantage of that, argues The Economist, however, is that the PBoC will be able to monitor where money is and what it’s being spent on. In that way the central bank can control the flow of cash to achieve its monetary aims. That would also enable policy-makers to ensure money leant to banks to help foster grassroots businesses during times of hardship – such as the huge amounts of stimulus being pumped into the economy now – can be guaranteed to reach its intended recipients.
Toppling the dollar
China has been flagging the idea of a central bank digital currency (CBDC) since 2014 as cashless transfers became more commonplace.
Some commentators, especially in the cryptocurrency media, have argued a digital yuan would improve China’s chances of toppling the dollar as the global reserve currency and with it, realise Beijing’s hopes of reaching escape velocity from the foreign exchange yoke of the US dollar, and also Washington’s geopolitical – and sanctions-setting – influence.
“This becomes a mechanism by which (the yuan) can be used in everyday transactions all around the world,” Jeremy Allaire, CEO of American cryptocurrency financial services firm Circle was quoted as saying by CNBC news. “It’s ultimately a foundation for the internationalization” of the yuan.
It’s tempting to suggest the idea has taken on a greater allure recently as increased trade tension between Beijing and the White House and their increasingly vitriolic row over the cause of the coronavirus pandemic deepens China’s hopes of creating its own financial ecosystem.
Analysts doubt a digital currency will be able to achieve that goal, however. As well as anything else, investors distrust the legal backing and institutions that underpin the fiat currency, so they’re unlikely to warm to its digital form.
But many suggest it can help in the internationalisation of the yuan. Being first to create a currency that is easier to store and use overseas would confer “a first-mover advantage to greater currency use, though not necessarily to reserve currency use,” Tommaso Mancini Griffoli, deputy division chief of the IMF’s central bank operations division, was quoted as saying in the Wall Street Journal.
Aditi Kumar, executive director of the Belfer Center for Science and International Affairs at Harvard Kennedy School, argued that if the US wasn’t quick to follow suit, the dollar may sink.
“The risk of inaction could diminish America’s strategic influence,” Kumar argued in the Los Angeles Times. “Without a digital currency offering of its own, the US could find itself fighting a global campaign to prevent the proliferation of Chinese technology, much like it is doing today with Huawei’s 5G communications infrastructure.”
Also read: Unexpected China export growth helps yuan