History condemns those who do not take it seriously. The establishment of the Amsterdam Stock Exchange in the early 17th century, together with the expansion of a commercial empire and technological progress, helped the Dutch achieve the highest standard of living in Europe by the mid-17th century. The creative move to establish the Amsterdam Stock Exchange has aroused the interests of economic historians to explore the positive wealth-creating effect brought about by such financial innovation.
Being a famous historian, Niall Ferguson reminds us that countries that have led in financial innovation have led in other ways too. As a pioneer of central bank digital currency (CBDC), China plays a leading role in exploring innovative ways to use its CBDC to facilitate the circulation and internationalization of the yuan amid the peaceful rise of China.
In 2014, the People’s Bank of China established a team to conduct research on the digital yuan (e-CNY).It’s the first digital currency to be issued by a major economy, undergoing public testing as of April 2021. The e-CNY is legal tender and has equivalent value with other forms of the yuan. It will function like cash in circulation, technically called M0, rather than M2 (broad money supply), which can generate credit and impact monetary policy. It has collaborated with big commercial banks, telecom operators and internet payment platforms such as Alipay and Tencent’s WeChat Pay.
The e-CNY app is designed to let users transfer money from their digital accounts to top up a digital wallet and choose which apps they would like to use the e-CNY for. When a person tops up his digital wallet from his bank account, he is essentially doing the virtual version of withdrawing cash from an ATM. By using a variety of sophisticated technology, the e-CNY offers enhanced security and privacy for users. Another advantage of e-CNY is “managed anonymity”. Unlike Alipay and WeChat Pay, the e-CNY enables users to make small transactions without disclosing personal information.
The PBOC aims to extend the trial of the e-CNY to a number of cities, including Chongqing, Tianjin, Hangzhou and Guangzhou. Other cities such as Shenzhen and Suzhou have already been involved since late 2019. The PBOC has recently announced that it will expand the e-CNY pilot program to 11 more cities around China, including the six cities in Zhejiang province that will host the now-postponed 2022 Asian Games. Not to be outdone, Hong Kong has planned to roll out a pilot programfor the use of the e-CNY for shopping and dining.
Though technically ready for cross-border use, the e-CNY is now focusing on domestic retail markets. Supported by a retail payment infrastructure that is reliable, efficient, adaptive and open, the e-CNY system will bolster China’s digital economy, enhance financial inclusion, and make the monetary and payment systems more efficient. Like other Chinese fintech apps, the e-CNY app is easy to use and carries low transaction costs. At present, transfers within Alipay and WeChat Pay are free within their respective ecosystems, and generally have a supercompetitive 0.1 percent fee for transfers outside their ecosystems.
In the long run, a scaled-up e-CNY, running alongside the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, would remove the initial geographical constraints on the e-CNY and allow it to play a significant role in international trade settlements.
Rae Deng, a founding partner of Du Capital in Singapore, suggests that the e-CNY could form a parallel ecosystem to run alongside SWIFT, carried around the world by the Belt and Road Initiative launched by China. “Digital migration” is an important force to transform the international trade settlement system.
Responding to the freezing of much of Russia’s foreign exchange reserves by Western central banks after the outbreak of the military conflict in Ukraine, Goldman Sachs said the US dollar could go the same way as the British pound in losing its status as a global reserve currency. The above sanction serves as a reminder that dollar assets may not be safe-haven assets at a time of escalating geopolitical conflict. Moreover, there is a need to find an alternative payment system for trade settlements.
If there are reduced financial transactions going through the international settlement system dominated by SWIFT, American ability to deliver “soft power” through SWIFT will also be reduced. Recently, Saudi Arabia has hinted that it will sell oil priced in yuan to China. Apart from the need to insulate their assets from possible Western sanctions, some non-Western countries are also attracted by cheaper cross-border money transfers offered by digital currencies.
Taking a long-term perspective, a scaled-up e-CNY will create a favorable environment for promoting the internationalization of the yuan. If e-CNY wallets are widely used by a couple of billion people, starting with those along the Belt and Road Initiative, they may give second thought to the continued use of their own currencies or the dollar. They will soon shift to e-CNY if it does offer speed, convenience and safe person-to-person transfers. As former IMF chief economist Kenneth Rogoff has correctly pointed out, competition to reduce the influence of the dollar will come from state-sponsored assets. It hardly needs to be emphasized that e-CNY will be a strong competitor.
At the moment, the major impediment for the yuan to become a global reserve currency is that it is neither fully convertible nor free-floating. Since the end of World War II, the US dollar has been widely accepted as a currency of choice for international trade. The yuan will have a long way to go before it wins wider appeal as a global reserve currency and a currency of choice for international trade. We see much substance in the argument of Eswar Prasad, an economist at Cornell University, that the digital yuan will hardly put a dent in the dollar’s status as the dominant global reserve currency. Nevertheless, e-CNY has the potential to challenge the dollar’s domination as the currency of choice in international trade settlements in the long run. The credibility of the dollar as a global reserve currency has also been undermined by the sanctions against Russia.
Junius Ho Kwan-yiu is a Legislative Council member and a solicitor.
Kacee Ting Wong is a barrister, a part-time researcher of the Shenzhen University Hong Kong and Macao Basic Law Research Center, and a co-founder of the Together We Can and Hong Kong Coalition.
The views do not necessarily reflect those of China Daily.