Editor’s note: China Daily Hong Kong’s GBA Focus series today introduces an opinion section that offers thoughts and suggestions by experts in various fields on how best to develop the Bay Area and integrate Hong Kong into China’s national development plan by leveraging its advantages as an international financial and legal services center. We welcome readers’ input on this historic project.
The digital yuan will be the start of a new era in payments, allowing China to be the first major economy to deploy its own central bank digital currency (CBDC).
A CBDC is a new form of central bank money accessible to the general public, accepted as a means of payment, legal tender, safe store of value by all citizens, businesses and government agencies. Theoretically, a CBDC should enable cheap, secure and real-time transfer of value, be accessible without a bank account and be built on an open infrastructure to foster competition and innovation.
There are many possible motivations behind CBDCs: They can replace physical notes; they can be used to improve financial stability as a monetary policy tool (to reduce the lower bound on interest rates), to promote financial inclusion, to fight against financial crime, etc.
Since CBDCs are “programmable money”, it will be up to each government and central bank to decide where they want to put their focus. Undeniably, China’s digital yuan will be beneficial in all the areas mentioned above, but, to me, the main rationale behind the Chinese government eventually launching its digital yuan is to promote the use of the yuan for cross-border payments, thus converting some of the US-dollar-denominated international trade transactions into renminbi-denominated ones, thus slowly challenging the dominance of the US dollar in international trade and finance.
Since Hong Kong is one of the most open and global cities in the Bay Area, China will be able to leverage this circumstance to promote its digital currency on a global stage, so it is undoubtedly a win-win for all the parties involved
Related to this, as I mentioned in my latest article “RCEP to help virtual yuan adoption”, the free-trade area created by the Regional Comprehensive Economic Partnership (which the Hong Kong Special Administrative Region, too, will soon join) will undoubtedly be a big market for China’s digital yuan, along with the Belt and Road Initiative. While facilitating cross-border adoption of the digital yuan, such economic exchanges will help other CBDCs in Asia. Through the RCEP, China will strengthen trade ties with its neighbors and will be able to leverage the agreement to facilitate cross-border adoption of its digital yuan to benefit consumers, dealers, bankers, and industries across regions.
I am not saying that the digital yuan will not be useful in many other ways, since it definitely will help the Chinese government control much more efficiently its financial system (thus reducing the importance of, for example, shadow banking). It will cut down money-printing costs; it will facilitate more money transactions with lower costs, etc. But, to me, the key idea is that of cross-border payments, and it is in this area where Hong Kong can and should play a key role.
Focusing on Hong Kong, on Dec 4, Hong Kong Monetary Authority Chief Executive Eddie Yue Wai-man announced that the HKMA and the Digital Currency Institute of the People’s Bank of China (PBCDCI) are discussing the technical pilot testing of using the digital yuan for making cross-border payments and are making the corresponding technical preparations.
According to Yue’s statement, “As the renminbi is already in use in Hong Kong and the status of e-CNY is the same as cash in circulation, it will bring even greater convenience to Hong Kong and mainland tourists. While there is not yet a timetable for the launch of e-CNY, it will certainly offer an additional payment option to those in Hong Kong and the mainland who need to make cross-border consumption.”
This is not the only CBDC-related project in which Hong Kong’s de facto central bank is currently working.
On Feb 23, the Central Bank of the United Arab Emirates and the PBCDCI joined a research project, initiated last year by the HKMA and the Bank of Thailand, to address various cross-border payment issues by using CBDCs and a blockchain platform. Other parties involved include Hong Kong Exchanges and Clearing, 19 banks and a few other companies, like ConsenSys, which was awarded a cross-border payment network study project by the HKMA as part of Phase 2 of the project.
This project, as per a joint statement, will then “further foster a conducive environment for more central banks in Asia as well as other regions to jointly study the potential of DLT (distributed ledger technology) in enhancing the financial infrastructure for cross-border payments”.
The major economy leading the CBDC race in the world is China. On Aug 14, China’s Ministry of Commerce announced that a pilot run of the country’s CBDC, the Digital Currency Electronic Payment, or the digital yuan, would begin in several new areas soon, the Bay Area among them, including the two special administrative regions of Hong Kong and Macao. However, it was not specified when these tests would start.
This second phase of testing comes just a few months after the initial phase, which started in April, when, after several years of work (the research commenced in 2014), the Chinese government announced that the digital yuan tests would start in Shenzhen, Suzhou in Jiangsu province, Chengdu and Xiong’an, notwithstanding the COVID-19 crisis. The idea is to have the digital yuan fully deployed by the 2022 Winter Olympic Games in Beijing.
The digital yuan tests have not started yet in Hong Kong, but they are about to start soon.
The digital yuan tests in Hong Kong, and potential future deployment, are of enormous importance to both the Chinese mainland and Hong Kong. To the mainland, because the free-trade area created by the RCEP, alongside the Belt and Road Initiative, will undoubtedly be a big market for China’s digital yuan. To Hong Kong, because this cross-border adoption needs to be tested first, and, in this sense, Hong Kong seems the perfect platform to do so.
The digital yuan does not aim to replace the Hong Kong dollar, since the digital yuan tests in Hong Kong and Macao (and its future deployment once the tests are complete) will aim at cross-border transactions. Since Hong Kong is one of the most open and global cities in the Bay Area, China will be able to leverage this circumstance to promote its digital currency on a global stage, so it is undoubtedly a win-win for all the parties involved.
The year 2019 proved to be one of Hong Kong’s most traumatic periods, which saw some of the most violent street clashes. The civil unrest was seamlessly followed by the ravages of the COVID-19 pandemic in 2020 and in 2021 so far. The two events seriously dented Hong Kong’s economic growth, and therefore the special administrative region needs to leverage any opportunity to grow again as it did before the civil unrest.
Since Hong Kong, Macao (to a lesser but relevant extent) and the rest of the Bay Area are becoming fintech hubs, Hong Kong should leverage its strength in fintech as well as its involvement in the Bay Area blueprint to lead the digital yuan tests and future deployment for cross-border payments.
President Xi Jinping opened a meeting in Beijing on the week starting Oct 26 to map out the next phase of economic development. China’s 14th Five-Year Plan (2021-25) is expected to center on technological innovation (hence the importance of fintech), a cleaner environment and economic self-reliance.
The best way for Hong Kong to align with this focus on technological innovation is precisely to keep doing what it is doing now and to keep involving as many stakeholders as possible in the digital yuan tests.
Hong Kong, as the largest offshore yuan trading center and a crucial part of the Bay Area, will be a good case study for the use of the digital yuan for cross-border transactions, and it can and should play a key role when it comes to the digital yuan’s future deployment, quite likely next year.
As we saw, China’s rationale behind its digital yuan is multiple: monetary and social policy, technology and innovation, global geopolitics, financial-crime prevention, etc. But, undoubtedly, one of the major reasons behind it is to facilitate the cross-border adoption of its new digital currency and thus challenge the global dominance of the US dollar, since, at the end of the day, one of China’s main objectives is to convert some of the US-dollar-denominated exports into yuan-based exports. Therefore, it is in China’s interest not only to make the digital yuan an effective domestic tool for facilitating consumers’ retail payments, but also to enhance the yuan as a payments currency in the global financial system.
The author is a member of the blockchain, digital banking and Greater Bay Area committees at the FinTech Association of Hong Kong.
The views do not necessarily reflect those of China Daily.