[Quantum Economics] What Are the Reasons Behind China’s Quest to Launch the First Major Digital Currency?
It is a Chinese custom to gift money in red envelopes in celebration of the Lunar New Year. This year, the Chinese government added a modern twist, handing out 10 million of the country’s digital yuan to 50,000 residents in Beijing, while 30 million digital red packets will be distributed in Suzhou.
The distribution was the latest in the country’s digital currency trials. Beijing residents will receive 200 digital yuan to be used at preselected locations or to buy select products at online retailer JD.com.
The potential benefits of a central bank digital currency (CBDC) include revolutionizing payments and providing faster payment efficiency, as well as improving financial inclusion. A CBDC will also provide central banks with information in real-time, allowing them to know what transactions are taking place in the economy and where.
This heightened visibility could help policymakers develop better-informed policies, such as targeting specific industries and demographic groups.
China is already the largest cashless society and is the most advanced major economy on track to launch a CBDC. What are some of the other reasons driving the world’s second-largest economy to establish a digital currency?
Reduce Dependence on the US Dollar
While many countries are investigating the implications of a sovereign digital currency, China has taken the lead. If adopted broadly as a system to streamline trade and reduce risk, will China’s digital currency, the DCEP (Digital Currency Electronic Payment), become the world’s reserve currency?
Many businesses in developing countries face a distinct geopolitical disadvantage due to the Western nature of the current global financial system, Nir Kshetri, a professor at the University of North Carolina-Greensboro who teaches in the Department of Management, told Quantum Economics.
“One of China’s primary goals in releasing the DCEP is to reduce its dependence on the U.S. dollar and, in turn, on SWIFT, the Society for Worldwide Interbank Financial Telecommunication,” he stated.
SWIFT, headquartered in Belgium, is a global provider of secure financial messaging services. The organization was founded to establish common practices among international banks and facilitate payments between banks to send and receive financial information, including currency transactions and international trade, and is thought to be heavily influenced by the United States.
One of China’s first moves to break away was in 2015, when the country launched the Cross-Border Interbank Payment System (CIPS), allowing businesses in Asia and Europe to send funds in renminbi to bank accounts in China without using SWIFT.
CIPS is especially attractive for countries that are adversely affected by U.S. sanctions, including Iran. According to Kshetri, African nations receiving investments from China-led infrastructure projects under the Belt and Road Initiative are also using CIPS, and as of mid-2019, hundreds of banks from 89 countries had participated in this initiative.
Recently, SWIFT and the People’s Bank of China partnered in a joint venture, called the Finance Gateway Information Services Co., designed to further China’s ambitions for the DCEP. CIPS is a shareholder in the new joint venture. China’s aim to be a global reserve currency is in the beginning stages. Recent SWIFT data shows that less than 2% of global transactions on SWIFT’s platform were denominated in the renminbi in October. While over 37% were in U.S. dollars, usage has been on the decline.
According to Stanley Chao, author of “Selling to China” and president of All In Consulting, the new joint venture is a stepping stone for China to learn more about digital currencies, cross-border payments, and systems integration and data processing. At the same time, SWIFT wants to get an early start on digital currency and cross-border payments with central banks. Chao told Quantum Economics that “SWIFT is highly controlled by the U.S., and as the U.S.-China high-tech bifurcation deepens, China will not want any dependency on the U.S., especially when it comes to its digital currency.”
As China seeks its own proprietary international payment system, high-tech bifurcation and high-tech independence are on the radar.
Chinese technology companies have begun to operate in developing countries, and these operations have created horizontal integrations required for China’s digital currency’s adoption. Chinese technology companies have been accelerating their activities in Africa for several years. These companies now account for nearly 50% of the mobile handset market and 70% of the mobile network infrastructures in Africa. Due to this, Chinese handset companies are now in a position to embed chips to facilitate the adoption of the DCEP in their handsets in Africa and other developing countries, said Kshetri.
To further China’s technology dominance goal, the new Huawei Mate 40 Smartphone series has an embedded hardware wallet that supports the DCEP. As most phones in Africa are from China, this is another step toward globalizing adoption of the digital renminbi.
Belt and Road Initiative
In developing the Belt and Road Initiative (BRI), China aims to establish its sphere of influence, improving connectivity and cooperation. The goal of this long-term policy is to connect Asia with Africa and Europe through various infrastructure projects, in countries with low internet access and primitive banking services. Offering the DCEP will allow these countries to buy and sell products with China with greater ease, eliminate their reliance on the U.S. dollar, and make the renminbi the currency of choice.
The BRI is another way China is working to globalize its currency and reduce the dominance of the U.S. dollar in the global financial system. Chao commented, “making the renminbi stronger, easier to use, and more popular is part of China’s goal of breaking away from the U.S., and its digital currency is a big part of this strategy.” The BRI is expected to invest more than $1 trillion in infrastructure in over 100 countries.
Preference for Crypto
Due to the decentralized nature of blockchain-based solutions, small firms in developing countries experience less hassle using these types of payment solutions. Developing-world-based small businesses have been increasingly utilizing crypto-denominated international commerce, citing greatly improved speed and efficiency by making payments in cryptocurrencies rather than major international currencies such as the U.S. dollar or the euro.
Bitcoin’s usage has been growing in developing economies. Recent analysis by Chainalysis shows a large growth in crypto sent back and forth from Latin America to East Asia, indicating many commercial transactions between East Asia-based exporters and Latin American importers. Many importers make payments using bitcoin because of the speed and ease with which they can settle the payments, noted Kshetri.
Some Chinese employers use cryptocurrencies so that their employees in Africa can receive faster payment. The Kenya-based blockchain startup BitPesa helps to speed up the flow of cash from businesses in China to their African employees, who send money to their families. BitPesa uses bitcoin to facilitate low-cost and instant payments.
While a CBDC is backed by a country’s central bank, other digital currencies such as bitcoin, are not. But as individuals in these countries are accustomed to using crypto, switching to a digital currency should be easy to facilitate.
China’s Ultimate Goal
While the Biden administration looks to be more trade-friendly, the effects of the last four years seem irreparable. According to Chao, China will do everything in its power to enhance the country’s domestic semiconductor, aerospace, 5G, IoT, and AI industries without relying on the U.S. “The trust between China and the U.S. in high-tech is broken, can’t be repaired, and will never come back,” said Chao.
Sky Guo, Founder and CEO of Cypherium, an expert in CBDCs and digital currencies, said that by rolling out the DCEP, China is looking to “quicken the adoption curve and get merchants, vendors, and other governments to continue working with the Chinese economy.”
China’s ultimate goal is to lessen the world’s dependence on the U.S. dollar and increase usage of the renminbi in either digital or paper form. A digital currency will strengthen China’s payments industry by lending it more power and transaction control, both locally and for trade.
Cypherium is a decentralized smart contract platform for creating and connecting dApps, CBDCs (Central Bank Digital Currencies), Enterprise Applications, and Digital Assets. We are one of the first blockchain companies with real, tangible blockchain applications in partnership with industry-leading enterprises and government institutions.