The Chinese CBDC (as the EP is known) will significantly strengthen China’s role as a global leader in finance. CBDCs are widely expected to challenge the dollar in world finance as they operate as electronic money and provide certain financial benefits, such as lower transaction fees, faster settlement, and more efficient clearance. CBDCs have also opened new avenues for central banks to work with technology companies. Here’s everything you need to know about the Digital Yuan.
China’s National Development and Reform Commission (NDRC) and People’s Bank of China (PBoC) have made a number of references in their official documents to an e-money platform, notwithstanding that nothing is yet on the commercial site. The project’s official name is “System for Electric Currency (e-money).” In addition, it has “digital currency” elements in its marketing material.
The framework of e-money is based on an open digital platform in which all companies that earn digital currency will join. The so-called “digital currency” is issued and managed by the system, a financial institution. The People’s Bank of China (PBOC). The PBOC’s role is to provide taxpayers with a secure environment for digital deposits. Let’s discuss whether the digital yuan is entirely centralized.
Is digital yuan completely centralized?
The digital currency ecosystem is part of the CBDC project, which the PBoC and NDRC govern. However, it belongs more to the PBoC as it controls its issuance and distribution. Therefore, the CBDC has been designed to merge most functions into the central authorities’ institutions.
Therefore, there are no significant threats to decentralization. In addition, the currency is not yet fully operational due to technical issues with big e-commerce platforms, including Taboo and JD.com. As a result, the digital currency will reduce costs when handling transactions in China’s digital economy, especially on giant e-commerce platforms such as Alibaba Group Holding Ltd.’s Taboo and JD Group’s Amazon China.
Transactions made with the digital yuan can be settled by users directly in the users’ accounts, which increases transaction efficiency and reduces cost. The introduction of digital currency will further expand the use of e-commerce in China, where transactions have been rising rapidly. In addition, it’s good news for Chinese state-funded blockchain projects as it will help them access large pools of capital from the Chinese banking system, allowing them to build a more secure infrastructure that can support industrial applications.
It’s worth noting that the issuance and circulation of digital currency is a private business that has nothing to do with China’s monetary policy, which will not change because of it. The monetary policy announced by the PBoC remains unchanged regardless of the introduction of the digital yuan.
The issuance and circulation of digital currency should be based on commercial considerations rather than research reports. The current stage of the issuance process is still being tested, so its impact on China’s monetary policy is not clear yet. From the current point of view, it will have little impact on China’s monetary policy in the short term.
How is the digital yuan a tool for internationalization?
Digital currency is not just a tool for domestic digital currency-related applications but also a representative of China’s internationalization. Its introduction could attract more investment from foreign companies. It will also encourage more cooperation with foreign financial institutions, especially in the field of innovation.
The introduction of digital currency will benefit the financial sector by increasing mutual trust among Chinese and foreign banks and encouraging more banks to use the currency. In addition, establishing Chinese government bonds will also help increase trust with foreign investors and promote global financial cooperation between China and other countries.
Considering all these aspects, the digital yuan could be a general tool for globalization and an engine that hastens internationalization. To sum up, it seems that PBoC and NDRC are very confident about the security of the digital yuan and its advantages over paper money.
The introduction of blockchain technology into digital currency will have an even better boost. And finally, to solve China’s currency shortage issue, in order for Chinese companies to achieve competitiveness globally (especially in the field of intellectual property protection), the country should have a joint electronic currency with other countries.
All these reasons confirm that introducing the digital yuan will align with China’s policy to promote internationalization.
Will the digital yuan be a rival of the dollar?
It’s too early to tell what kind of effect on the dollar. But if we assume that it could affect the US’s status as a global leader in finance, it might impact U.S.-China relations and bilateral trade. Of course, it is still unclear how much users in the real economy could use digital currency. But suppose China’s policy allows foreign companies and institutions to use it. In that case, it will benefit China-based companies and facilitate internationalization for companies from other countries and regions.