In the second of this two-part series recognizing the one-year anniversary of the unveiling of China’s digital currency, Forkast.News looks at the influence the DCEP digital yuan — still in the testing phase — could have on international trade and the world’s banking system. Part I examines the milestones that the digital yuan has achieved in the past year.
For a year, since China began testing a central bank-backed digital currency, global banking experts have been speculating about the government’s intentions. Last Sunday, officials attempted to tamp down geopolitical concerns and said that China’s digital yuan is not aiming at dethroning the U.S. dollar as a global standard.
“Our goal is not to replace the U.S. dollar or any other international currency,” said Li Bo, deputy governor of the People’s Bank of China (PBOC), on April 18 at the Boao Forum. The event is known as the “Asian Davos,” and takes place every year in Boao, in Hainan province. “Our goal is to allow the market to choose and to facilitate international trade and investment.” His remarks were reported by Economic View, an online financial news website owned by the China News Service.
Zhou Xiaochuan, former president of the PBOC, also spoke at the forum. He said the initial purpose of its DCEP — “Digital Currency, Electronic Payment,” as the project was originally called — is to create a more convenient payment system for the Chinese public.
“China has a very large retailing market, 1.4 billion people, and everyone wants a technology system that is more convenient, more efficient, and less costly,” Zhou said.
But these statements have not eradicated speculation that China’s DCEP will, eventually, topple the U.S. dollar in international trade and finance.
“China wants to show that it’s not trying to seek a new world order, but simply wants its place in the new world order, and that the U.S. and China should be seen as equals,” said Stanley Chao, managing director of All In Consulting and author of “Selling to China: A Guide for Small and Medium-Sized Businesses.” The PBOC deputy governor and former president’s remarks exemplified the “equal footing” position, Chao added, as Li said DCEP aims to simply provide more payment options.
“Though the primary reason for the DCEP may be for domestic purposes and usage, there are still secondary and tertiary motives and that’s for the DCEP to replace or at least be a second option to the USD as a reserve currency,” Chao added.
Covid-accelerated progress
Even though Li and Zhou played down the ambition and global influence of the digital yuan, they cannot deny Beijing’s determination to speed up its development, even in the midst of the U.S.-China trade war and the Covid-19 pandemic.
“The trade war and the pandemic have both actually accelerated the whole project of launching DCEP,” Matteo Giovannini, a senior finance manager at the Industrial and Commercial Bank of China (ICBC), told Forkast.News.
“In terms of the trade war, China has been looking quite a long time for a way to depend less on the dollar and to avoid incurring possible retaliation,” Giovannini said. The pandemic, he added, further enlightened the banking community at large to the risks of exchanging physical cash.
China’s progress on bringing its digital currency to market continues at a breakneck pace. Within the last week, DCEP achieved several milestones. The port city of Sansha in Hainan province began to promote the DCEP payment method with a digital yuan discount on April 13. For the first time in the aviation industry, an airline has begun accepting DCEP, as Spring Airlines — also known as Chunqiu Airlines — implemented its new policy on April 17. And the Shanghai provincial government announced on April 19 another DCEP trial — this time testing cross-city transactions between residents in Suzhou and Shanghai. That experiment will kick off on May 5.
“It’s evidence that the government is strongly committed to making this happen. That’s the most obvious takeaway,” Alex Tapscott, co-founder of the think tank Blockchain Research Institute, told Forkast.News on April 15, reacting to the rapid expansion of DCEP testing.
Hainan’s digital yuan promotion, he added, “ is a great way to highlight and showcase what they’re doing. And also conveniently to showcase how it might be used not only inside of China but also as a tool for global trade.”
Challenging the U.S. dollar
DCEP’s speedy developments are raising concerns in the U.S.
President Joe Biden’s administration is scrutinizing China’s digital currency, according to Bloomberg. Some officials are “concerned the move could kick off a long-term bid to topple the dollar as the world’s dominant reserve currency.”
Officially, however, Federal Reserve Chairman Jerome Powell seems unhurried about launching a digital dollar despite China’s rapid expansion of DCEP. Powell said the digital dollar is “a high priority project for us,” and added, “we don’t need to be the first, we need to get it right.”
Chao thinks there is cause for more concern.
“[DCEP] could weaken the power of SWIFT, which is dominated by the U.S. dollar,” he said. And more pointedly, the rise of the digital yuan can remove the power of U.S. sanctions, which are often in the form of withholding financial aid to encourage certain behavior from other nations. “In the future, countries like North Korea, Iran and Iraq all could use the DCEP to circumvent U.S. sanctions.”
China is intentionally expanding its global influence through the digital yuan as part of the country’s ambitious Belt and Road Initiative, aimed at expanding its trade and economic influence to Asia, Europe and Africa.
“China could use DCEP to leverage the agreements and relationships built along with the Belt and Road project and in the RCEP [Regional Comprehensive Economic Partnership, a free trade agreement among 15 Asia-Pacific nations] to convey the utilization of its own virtual currency by increasing the circulation,” Giovannini said.
The digital yuan has built-in appeal for many developing countries, too, that may benefit from its internet-free and phone-free features. “DCEP acts as a soft power tool enabling China to expand its sphere of influence especially to the developing countries in Africa and South America where banking systems and fintech are still quite antiquated,” Chao said.
America still dominates the financial world, however. The U.S. dollar is still the most-accepted hard currency in the world and SWIFT’s services are available to more than 11,000 banks in over 200 countries and territories. In the short term, banking experts say, the U.S. dollar has nothing to fear. But the long term is another thing altogether.
“It is going to be like a chess game where every move matters,” Giovannini said. “China’s first-mover advantage in the launch of a virtual currency could potentially lay the groundwork for, in the future, unseating the U.S. dollar from decades-long dominance.”