BOFIT Viikkokatsaus / BOFIT Weekly Review 2021/14

With the successful trials of state-issued digital currency in four cities (Shenzhen, Suzhou, Chengdu and Xiong’an), the People’s Bank of China will now expand the experiment to include other major cities, including Beijing and Shanghai. China’s issues of “digital yuan” are still small for the moment. For example, 20 million in digital yuan lottery winnings were issued in Shenzhen and 10 million in Beijing at the start of the year.

The rapidity of this development is evidenced by the fact that China’s giant state-owned banks have already launched marketing campaigns to raise public awareness of the convenience of the new digital currency. The high demand in China for electronic payment services has been a driving factor in development of a state digital currency. Many Chinese today pay for their purchases on proprietary platforms provided by private service companies (Alibaba, Tencent, etc.). The PBoC’s digital yuan also gives the Chinese government better possibilities to track payment flows.

While commercial service providers and central banks around the world have been studying the potential benefits of digital currencies, China’s central bank is at the forefront. While no schedule has yet been announced, the digital yuan is expected to be in wider use already at the 2022 Beijing Winter Olympics.

The PBoC is also testing use of the digital yuan in cross-border payments in cooperation with the central banks of Hong Kong, Thailand and the United Arab Emirates. It is hoped that the tests will provide new information on the technological limits of cross-border payments with central bank-issued digital currency, as well as how such digital currency might complement current international payment practices. Chinese officials have been active in drawing up digital currency standards via e.g. the Bank of International Settlements (BIS).

The Chinese have long criticised the international financial order for over-reliance on Western currencies, particularly the US dollar. The dollar’s central role in international trade and payments gives the US opportunities to impose strict economic sanctions to coerce behaviour of other countries. This was seen last autumn, for example, when the US imposed economic sanctions on certain officials in mainland China and Hong Kong in response to the crackdown in Hong Kong. China’s adoption of its own digital currency may help to advance China’s challenge to the incumbent financial order.

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