China is leading the way in digital currencies, and their rise could have profound implications for the global economy. The Chinese government is currently conducting trials of its digital yuan, or digital currency, in many cities, and the digital yuan was already used in nearly $8 billion in transactions during the second half of 2021. The country’s first-mover advantage is a critical component of its strategy to dominate the global digital currency market. According to some scholars, the successful development of the digital yuan will allow it to internationalize its currency.
However, most articles on China’s CBDC have focused on its domestic use. I would argue that it is more important to look at the possibility of using the digital yuan to replace the US dollar in global transactions. To do this, I have divided the article into five parts. The first part examines the differences between digital yuan and cryptocurrencies, and the second part details how China plans to use its digital yuan to compete with the US dollar.
While the rise of the digital yuan is unlikely to destroy the dollar, it would certainly dent its status quo. Indeed, it could be the spark to a currency war, separate from the ongoing tech and trade wars. Moreover, the New York Times recently reported that the US Treasury Department has gained access to the records of international financial transfers to track terrorist financing.
In addition to the benefits of DCEP, the rise of the digital yuan has significant implications for the rest of the world. China has deep ties with other countries in Asia, as evidenced by frequent travel and investment opportunities. However, wider adoption of DCEP implies that transactions will no longer be denominated in US dollars but instead in digital yuan. This could be a problem for some of China’s trading partners because of currency constraints.
China has been moving faster than any other major economy when it comes to digital currencies. It even issued its own official digital currency, the e-CNY, and is far ahead of the United States. It also recently announced that more than ninety percent of urban consumers in China use digital payment services such as Alipay and WeChat Pay. Furthermore, over 100 million people in China now use mobile phone digital wallets.
As of now, e-CNY is being used primarily for domestic retail payments. However, the country’s government also plans to promote the use of the e-CNY in government affairs and taxation. The PBOC’s Digital Currency Research Institute recently announced a partnership with the Rural Credit Bank Capital Clearing Center (RCCBCC), a rural financial institution that is promoting e-CNY in rural areas. In fact, this partnership is aimed at expanding the adoption of the digital currency in rural areas, which account for 40% of the population in China.
Beijing has introduced numerous policies to promote the adoption of e-CNY. These include increased government payments, a lower exchange rate, and lower fees. However, early e-CNY users are reportedly unsatisfied with the service, and they are worried about their privacy. By offering incentives, Beijing hopes to overcome these concerns. The government may also introduce promotional discounts for e-CNY.