China Is Doubling Down on its Digital Currency

Since 2014, the People’s Republic of China has been developing a digital currency called the digital yuan—also known as e-yuan, e-CNY, digital renminbi, or digital RMB. This new technology provides an array of options for overseeing China’s colossal and fragile financial system, as well as opportunities for economic influence abroad. Ultimately, the Chinese Communist Party seeks to make the digital yuan the go-to payment means for its 1.4 billion population, as well as advance China’s technological prowess on the international stage.

The United States has enjoyed global economic influence in part thanks to the US dollar being the dominant currency for trade, foreign exchange reserves, and cross-border transactions. However, China’s digital yuan has the potential to weaken the ability of the United States to retain trading partners, enforce sanctions, and monitor financial flows. Moreover, the digital yuan raises cybersecurity concerns related to data protection, espionage, and financial stability. With each year that China pilots its digital currency and the United States does not, Beijing becomes better positioned to dictate the norms and regulations of this new technology and Washington becomes a weaker competitor.

What Is the Digital Yuan?

China’s digital yuan is a central bank digital currency (CBDC) issued by the People’s Bank of China (PBOC) and valued the same as the standard renminbi (RMB). It is a legal tender since it is a digitized version of physical RMB. As FPRI Fellow Bob Murray has explained, CBDC transactions are “faster, cheaper, and theoretically more secure” than conventional methods such as e-payments or e-banking.

CBDCs function the same as withdrawing cash from an ATM. Transactions are completed instantaneously and at lower costs because intermediaries, namely banks, are not required to participate in the exchange. However, transactions are more secure than cash thanks to a “variety of technologies, including a digital certificate system, digital signature, and encrypted storage which make double-spending, illegal duplication and counterfeit, transaction falsification, and repudiation unfeasible,” according to a PBOC White Paper. Today, the digital yuan is still in the pilot phases primarily in large coastal cities, but is progressing towards an official launch across all of mainland China.

CBDCs such as the digital yuan are not the same as cryptocurrencies. In fact, cryptocurrency exchange operations were banned in China in 2017 and transactions were banned in 2021, largely because they are difficult to regulate. Cryptocurrencies like Bitcoin operate on blockchain technology which, in basic terms, is a decentralized, immutable ledger designed to circumvent established financial institutions. Alternatively, CBDCs are fiat currencies and therefore subject to government control. The value of the digital yuan is predictable since it is pegged to the same currency basket as the RMB, whereas the value of cryptocurrencies is determined by relatively volatile supply and demand. For a centralized state like China, a CBDC is far more attractive than a cryptocurrency.

Cryptocurrency transactions can be entirely anonymous, making it ideal for illegally moving money. Alternatively, the digital yuan is formulated to minimize financial crime and identify troublemakers. However, this raises questions about surveillance and privacy. According to a PBOC press release, the digital yuan provides “anonymity for small amounts, legal traceability for large amounts,” and the central bank guarantees the “reasonable personal information protection needs of the public.” Users’ data will not be shared with government officials “unless stipulated otherwise in laws and regulations,” according to a PBOC White Paper. Article 28 of the Cybersecurity Law already allows the government to acquire data from any Chinese entity in the name of “national security,” so in reality, anonymity is actually conditional and ambiguous.

China was the first major economy to test a CBDC when it began pilots in April 2020. The government rolled out the currency in just four cities: Shenzhen, Suzhou, Xiongan, and Chengdu. Last fall, the PBOC vice president announced that the digital yuan trial program will expand, bringing the total number of pilot areas to fifteen provinces and twenty-three cities. The addition of Chongqing and Guangzhou, two megacities, means that China’s top five largest cities are now offering the digital yuan as a payment option to a combined population of 98 million people. Moreover, six cities in Zhejiang were added because the province is hosting the 2023 Asian Games and the PBOC wants to test the digital yuan with foreigners attending the festivities.

Increasing Domestic Consumption

In January 2022, the PBOC published a report stating that 261 million people had set up a digital yuan wallet. On one hand, this figure is equal to the combined populations of Russia, Germany, and Canada, so this is a solid achievement for only two years of pilots. On the other hand, approximately 903.6 million people utilize mobile payments in China, so a 28.89 percent uptake rate is less than impressive. Plus, having a wallet does not mean there is any money inside, so it is unclear how many of those 261 million people are actually putting it to good use.

Many digital yuan wallet-holders probably created them in hopes of winning free cash. Over the course of 2022, eleven pilot cities, including Beijing and Shanghai, launched digital yuan lotteries giving away a total of ¥340 million RMB ($50.47 million). In the summer of 2022, Meituan, a major online shopping platform, launched a ¥30 million RMB lottery, and then Fuzhou’s official app organized another lottery worth ¥20 million RMB. To welcome the Lunar New Year– a notoriously high-spending holiday in China—the digital yuan app offered a multitude of discounts and promotions as well as red envelopes containing digital yuan for gifting to friends and family.

Giveaways are enough to persuade consumers to start using digital yuan, but not enough to guarantee sustained use. To ensure the adoption of new technology, it has to seamlessly integrate into established norms. The vast majority of Chinese people purchase everyday goods with their smartphones, so the digital yuan app went live in fifteen pilot cities in January 2022. The central bank’s next move was to partner with popular commerce platforms in order to reach those pre-existing shoppers. Tenpay (WeChat) and Alipay (Ant Group) facilitate about 93 percent of mobile payments in China so in order to compete, the digital yuan will need to be just as, if not more, ubiquitous.

Last summer, the Chinese government was still enforcing strict COVID-19 restrictions, so many households were still reliant on food delivery and the economy was struggling. In response, Meituan, the most popular delivery service in China, and Shenzhen, the sixth-largest city in China, rolled out a digital yuan lottery in which 67,000 merchants and 2.6 million customers participated. Coinciding with the lottery, Meituan also collaborated with five banks to issue digital yuan coupons worth ¥35.2 million RMB ($5.27 million). This was an explicit effort to popularize the digital yuan as well as boost consumption during an economic downturn.

Partnering with online shopping platforms is not a new strategy. In July 2022, JD.com, China’s largest online retailer, announced that it had processed more than 4 million transactions worth ¥900 million RMB ($133.5 million) since it began accepting digital yuan as tender in 2020. Ant Group incorporated the digital yuan into its platform starting in May 2021 and WeChat recently followed suit in March 2023. This is critical because prior to these developments, Ant Group only accepted Alipay and JD.com exclusively took Tenpay. The digital yuan can undermine the duopoly with interoperability, because it can be spent anywhere and merchants avoid transaction fees, according to FPRI Fellow Bob Murray.

China’s central bank has delegated many digital yuan rollout responsibilities to China’s state-owned banks, the backbone of China’s financial system. For instance, last year, the Industrial and Commercial Bank of China added a “smart exchange function” to its mobile banking app so that customers can automatically convert digital CNY wallet balances into bank deposits. More than forty employers in Hainan province used Bank of China’s (BOC) digital yuan service to pay wages. China Construction Bank began accepting digital yuan to purchase wealth management products. Agricultural Commerce Bank announced that it had issued the first-ever digital yuan loan worth ¥500,000 RMB ($73,986). These banks hold leverage over millions of individuals and thousands of companies both inside and outside of China, so they offer a clear path to widespread adoption of the digital yuan.

Local governments are integrating the digital yuan into everyday public programs. For example, starting in April 2022, residents of Zhejiang province could spend digital yuan to pay for taxes, stamps, and social security. The digital yuan was also accepted as payment for public bus rides for ten routes in Guangzhou and for public subway rides at 125 stations in Ningbo. In April 2023, all government employees in Changshu city will receive salaries in the form of digital yuan. If the goal is to make the digital yuan the go-to payment method across China, incorporating it into daily transportation and regular paychecks is the obvious strategy to follow.

In December 2022, a former PBOC research director surprised observers by publicly stating that “the results are not ideal … usage has been low, highly inactive.” This could be because consumers are simply not convinced that their entrenched payment methods are inadequate and they should go through the trouble of adopting a new one. Furthermore, China is still recovering from the pandemic, intrusive public health policies, and an uptick in government surveillance. Although the PBOC states that the digital yuan will respect individual privacy, it is as traceable as they design it to be. Therefore, it is not unreasonable for a Chinese citizen to assume that the digital yuan is just another lever for control and repression. On the other hand, the Chinese government devotes plenty of resources to developing this new technology and is unlikely to jeopardize success during the pilot stages by breaking promises.

The Digital Yuan Outside of China

The target market for the digital yuan is domestic, but the PBOC is exploring foreign use as well. Foreign athletes and tourists accessed it for the first time during the Beijing Winter Olympics in February 2022. A PBOC official told reporters that 2 million digital yuan ($315,761) was being spent every day at the Olympics, which is probably less than originally envisioned since attendance was limited due to COVID-19. Foreigners can test the digital yuan again later this year when they attend the 2023 Asian Games in Zhejiang province.

In September 2022, Hong Kong was added to the list of digital yuan pilot regions in order to experiment with cross-border payments; an ideal venue since the city is a separate legal entity but still firmly controlled by Beijing. If successful, this could contribute to the broader goal of strengthening the renminbi in the global financial system. In 2020, the RMB was the fifth largest asset in official foreign exchange reserves, and by the end of 2022 it was the third largest, according to data from the International Monetary Fund. The US dollar is still the most popular currency in reserves by far. This can be a problem for any actors looking to move money on financial infrastructure that is intertwined with the United States and Western-imposed sanctions.

In addition to piloting the digital yuan, the Hong Kong Monetary Authority is also engaged in the multiple central bank digital currency bridge project, also called mBridge or mCBDC bridge project. Under this scheme, China, Hong Kong, Thailand, United Arab Emirates, and the Bank of International Settlements are aiming to establish a multilateral system that can accommodate different digital currencies and legal regulations. FPRI Fellow Bob Murray depicts the current US-led financial system as analogous to mailing a paper check whereas mBridge, with its instantaneous transfers across any time zone, is analogous to Venmo. The first-ever mBridge pilot started in September 2022. According to a Hong Kong Monetary Authority press release, the banks completed 160 payment and foreign exchange transactions totaling more than HK$171 million, the largest cross-border CBDC pilot to date. If pilots demonstrate viability, mBridge could be a potential workaround to SWIFT and sanctions.

There are further opportunities for internationalizing the renminbi via the Belt and Road Initiative (BRI), an overseas development program intended to foster connectivity across the Global South. In very general terms, a typical BRI project involves a foreign borrower signing a loan agreement with a Chinese bank in order to finance an implementation contract with a Chinese state-owned enterprise. The Chinese side could take advantage of these agreements by mandating digital yuan payment for all of those debtors, borrowers, and contractors. In exchange for a new power plant or road network, borrowers could be forced to adopt the digital yuan. However, the requirement may be unnecessary. Many countries in the Global South lack the financial infrastructure to accommodate the dollar system, so transfers are costly and delayed. If China were to promote the digital yuan under the Digital Silk Road—a complement to the BRI which exports Chinese technologies to countries looking to leapfrog—recipients may jump on the opportunity to voluntarily decrease reliance on the dollar and replace it with the digital yuan.

That being said, PBOC President Yi Gang explicitly stated in October 2021 that there are “no plans to promote the digital yuan in countries along the Belt and Road,” so these are merely options on the table that the PBOC is apparently choosing not to pursue at this time.

Future of the Digital Yuan

Today, the PBOC is one of twelve central banks piloting a CBDC and is a leader in terms of applications and scope. In fact, by the end of August 2022, the value of all digital yuan transactions had reached ¥100.04 billion RMB ($15.06 billion). This still seems to be below the Chinese Communist Party’s expectations because senior officials set new key performance indicators for Suzhou city officials to accomplish by the end of 2023, including the facilitation of ¥2 trillion RMB ($300 billion) digital yuan transactions in Suzhou alone—which is twenty times greater than the total value of digital yuan transactions across China just six months prior. Clearly, the Chinese government is committed to elevating the digital yuan to the currency of first resort. Just this year, the PBOC counted digital yuan in the official measure of cash in circulation for the first time.

On the other hand, the United States has no plans to develop a CBDC and faces plenty of opposition. Federal Reserve Governor Michelle Bowman recently delivered a speech at Georgetown University hesitating to commit to a CBDC rollout. Republicans have taken legislative action citing surveillance concerns and government overreach. Sen. Ted Cruz has introduced two bills banning CBDCs, and Gov. Ron DeSantis just signed a bill in May 2023 banning some uses of CBDC payments in Florida.

Despite public backlash, there are still some research initiatives exploring the possibilities for a digital dollar. The Federal Reserve and the Massachusetts Institute of Technology’s Digital Currency Initiative collaborated under Project Hamilton to test the feasibility of a digital dollar platform. In March 2022, President Joe Biden signed an executive order which articulated an “urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest” in an effort to “[ensure] U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.”

In other words, the US government is aware that other actors are dictating the development of cutting-edge technology, but is still uncommitted to piloting or authorizing a CBDC. China is doubling down on its digital yuan for the foreseeable future and could be a decisive voice in CBDC standards around the world.

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The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.

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