China's digital yuan can leverage the Belt and Road Initiative

It has been speculated for years that the internationalized renminbi, buttressed with the rolling out of the digital yuan (e-CNY) domestically, will combine to fuel the momentum for the RMB to disrupt the dollar’s hegemony, at least along the Belt and Road countries.

In early January 2022, the People’s Bank of China (PBOC) — China’s central bank — jumped out as the first to launch digital yuan wallet apps for Android and iOS, an essential step to digitalize daily transactions — from purchasing insurance to ordering food deliveries via Meituan. The Chinese, especially the well-off young elites, can’t wait to dash toward digitalization.

According to data gathered in April, more than 260 million people are already using China’s digital currency, with more than $13.8 billion worth of transactions. It is available for use in over 20 mainland cities and is live on nine wallets. When food delivery personnel could show “transaction succeeded” on their smartphone displays in the booming Guangdong-Hong Kong-Macao Greater Bay Area during lockdown earlier this year, the PBOC benefited from the success of being at the forefront in digitalization. Central banks worldwide are implementing digital solutions to improve the efficiency of the financial system. Among the G20 members, 19 out of 20 are exploring the idea of a central bank digital currency, with 16 already in the development or pilot stage. The PBOC, however, tested the water as early as 2014 when several other countries lagged far behind in the research and planning phase. Some columnists maintain China’s early development will allow it to internationalize the RMB and disrupt the US dollar’s hegemony.

China is streets ahead in terms of digital payments and the digital yuan doesn’t disrupt existing ways to pay (with QR codes and face payments already being widely used in China through Alipay and WeChat Pay). However, the biggest innovation is its ability to use smart contract technology. The GBA, especially the Hong Kong Special Administrative Region, boasts inherent advantages in the development of blockchain technology.

Through smart contracts, users can agree on the use time, use scope and use rules: nontransferable, nonredeemable, time-out recovery, targeted use, targeted crowd, targeted scene, consumer welfare, coupon reduction, designed merchant consumption, etc.

The e-CNY provides many other advantages: no interest, low cost, payment and settlement, controllable anonymity, security, dual offline payment, etc. Alipay, WeChat, and bank wallets remain the same, however; the e-CNY is simply the money in those wallets, as China’s legal tender issued by China’s central bank.

China is eager to test the water. Since mid-June, China’s digital yuan has been allowed to be used for wealth management products and bank loans. This move by China’s central bank extends the use of the digital currency beyond offering the ability to purchase consumer goods. China Construction Bank now allows customers to use the e-CNY for wealth management products on its mobile app, according to Reuters. Chinese economists, including senior research fellow at the Chinese Academy of Social Sciences, Zhang Ming, now envisage “being digital” in every area of life, from using medical services to family financing. Sound radical? Not at all! As I mentioned in some of my previous articles, China’s national digital currency, also known as DCEP, is a CBDC. So being digital in China starts at the top of the pyramid and is supported by the grassroots at the bottom.

A CBDC is a new form of central bank money accessible to the public, accepted as a means of payment, as legal tender, and is a safe store of value for all citizens, businesses, and government agencies.

While more than 80 percent of central banks in the world are currently working on CBDCs (with some just at the initial research stages), Asia is where CBDCs have generated the most interest — and the major economy leading the CBDC race in Asia (and globally) is China.

Hong Kong, through the Hong Kong Monetary Authority, is currently engaged in three CBDC-related projects: the digital yuan (which is being tested in the SAR), the mCBDC Bridge project and the electronic Hong Kong dollar (e-HKD).

It is worth stressing that merely being digital is transformative, but not revolutionary without State strategic plans such as the Belt and Road Initiative (BRI). China’s digital yuan will be beneficial in many different ways, but one of the areas where it can bring more value is in promoting the use of the yuan for cross-border payments, thereby converting some of the US dollar-denominated international trade transactions into renminbi-denominated ones, and challenging the dominance of the US dollar in international trade and finance.

This will not happen overnight, but if there is enough penetration and acceptance of the digital RMB in a separate jurisdiction or region, it is conceivable that a trade and finance system parallel to the US dollar system can gain critical mass — a system that can allow certain countries to bypass the global banking system and US sanctions.

The BRI is currently a key initiative for China and, consequently, it is easy to imagine how important the expansion of the digital RMB could become for China within the BRI.

According to the official outline, the BRI is a global initiative with pathways along the historic Silk Road, which puts a major focus on countries in Asia, Eastern Africa, Eastern Europe, and the Middle East, a region mainly composed of emerging markets.

In my opinion, the BRI area is a prime candidate for China to start internationalizing its digital yuan, alongside the free trade area created by the Regional Comprehensive Economic Partnership.

As I mentioned in my article “Regional trade pact will pave way for digital yuan”, the RCEP, which was signed on Nov 15, 2020, and which came into effect on Jan 1, 2022, will strengthen China’s trade ties with neighboring countries, and will enable it to leverage agreements to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers and industries across regions.

To sum up, both the BRI and the RCEP will undoubtedly be two big markets for China’s digital yuan. While facilitating cross-border adoption of the digital yuan, such economic exchanges will also help with the implementation of other central bank digital currencies in Asia.

The author is a fintech adviser, researcher and a former business analyst for a Hong Kong publicly listed company.

The views do not necessarily reflect those of China Daily.