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Why is the Chinese yuan going digital?

China is now number one in the world for mobile payment integration, with 790 million people predicted to use such payments this year.

More than 60.5 billion mobile payment transactions were logged by Chinese consumers in 2018, with spending at 277.4 trillion yuan (US$39 trillion), a massive jump for what was once a mostly cash economy.

A digital currency backed by the government is now expected to push things to the next level.

Beijing has already started its trials of digital currency electronic payment (DCEP). If successful, the international financial system could be transformed, some analysts said.

The trials aim to cover a wide variety of use cases, ranging from retail to transportation and payment of wages.

The digital currency is being trialled in four Chinese cities – Chengdu, Shenzhen, Suzhou and Xiong’an.

The digital yuan was used to pay up to 50% of government workers’ travel expenses in May, according to Ms Shirley Yu, Asia fellow at the Harvard Kennedy School.

Involved in the trial are China’s four major national banks and three major telecommunications companies, as well as American companies such as McDonald’s, Starbucks and Subway.

The trial’s second phase is scheduled to take place in Beijing during the 2022 Winter Olympics.

In China last year, mobile transactions represented 80 per cent of payments made.

The DCEP, however, is more than a digital wallet or an electronic payment platform. It is a digital type of fiat money or currency whose value is government-backed.

It is just like having paper money and is pegged 1:1 to the paper renminbi.

Of course, digital money itself is not a new phenomenon, and the rise of the crypto industry has raised concerns about digital coins being used for money laundering.

Expert analysts, however, have suggested that virtual money might also tackle a different type of “dirty money” – as Chinese authorities learned during the COVID-19 outbreak.

Billions of dollars in cash were collected from the province of Hubei and sanitised during the outbreak, particularly from the centre of the pandemic in Wuhan.

Some of the money needed to be disposed of, however, to avoid transmitting the virus through banknotes and coins.

If that cash had been digital yuan, Mr Shi Yuntao from software consultancy ThoughtWorks China said, there would have been no such issues.

Another selling point for consumers, especially those not located in China, is that the platform does not require an e-wallet or a Chinese bank account.

Ben Cavender of the China Market Research Group sees potential for the digital currency in the Belt and Road Initiative, China’s ambitious aim to connect development and infrastructure projects in more than 60 countries.

“In these markets, there are a lot of consumers and small business owners, who may not have access to a bank. They may not have a way to change money, or they may be in an economy where their own economy’s value may fluctuate. And so, many of these people might be interested in using a digital currency like this because they can control their business relationship with China more easily. They’re not going to be losing money on foreign exchange, and making transactions is going to be much cheaper for them.”

In time, the yuan may become increasingly internationalised, but experts remain divided on whether it can compete with the supremacy of the US dollar.

Mr Jasper Lee of social trading network eToro said he believes that the digital yuan could eventually have a presence in the global markets, and also as a storage of value. This, he said, could eventually challenge the dominance of the US dollar.

The journey will be a long one, though.

Mr Shi pointed out that according to a survey by the Bank for International Settlements in 2016, the yuan’s share of foreign currency transactions was 4.3 per cent, compared with 88 per cent for the US dollar and 32 per cent for the Euro.

“There’s a long way to go to catch up even to the euro, the nearest rival to the US dollar,” Mr Shi said.

Mr Cavender said he believes the US dollar will remain a safe haven through tough times.

“But over the long-term, it’s very evident that there is going to be pressure to shift further towards these state-backed digital currencies, whether they be China’s or several others that might inevitably be developed in the next few years.

“By that point you will see less of a reliance on the US dollar as a hard currency or as a reserve currency because there are going to be these other alternatives which are stable and very easy to monitor and control.”

The prospects for China’s digital currency may also be tied in with China’s evolving position on the world stage.

As Ms Yu of the Harvard Kennedy School put it: “The DCEP itself cannot become a truly global currency just because it’s a digital currency, unless it recognises the renminbi as a true global currency. So fundamentally, it is about the nation’s financial state and its currency status, and that will drive this currency towards its usage and its adaptation globally.”

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